UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2014
OR
¬ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From
to
Commission
File Number 0-14278
MICROSOFT
CORPORATION
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WASHINGTON |
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91-1144442 |
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(STATE
OF INCORPORATION) |
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(I.R.S.
ID) |
ONE
MICROSOFT WAY, REDMOND, WASHINGTON 98052-6399
(425)
882-8080
www.microsoft.com/investor
Securities
registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $0.00000625 par value per
share
NASDAQ
Securities
registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes x No
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Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of
the Exchange Act. Yes ¬ No
x
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes x No ¬
Indicate by check mark whether
the registrant has submitted electronically and posted on its corporate website,
if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (¤232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes x No
¬
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K (¤229.405 of this chapter)
is not contained herein, and will not be contained, to the best of registrantŐs
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. x
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of Ňlarge accelerated filer,Ó
Ňaccelerated filerÓ and Ňsmaller reporting companyÓ in
Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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not check if a smaller reporting company) |
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Smaller reporting company |
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Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ¬ No x
As of December 31,
2013, the aggregate market value of the registrantŐs common stock held by
non-affiliates of the registrant was $284,539,953,282 based on the closing sale
price as reported on the NASDAQ National Market System. As of July 22,
2014, there were 8,239,848,789 shares of common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered
to shareholders in connection with the Annual Meeting of Shareholders to be
held on December 3, 2014 are incorporated by reference into Part III.
MICROSOFT CORPORATION
FORM 10-K
For The Fiscal Year Ended June 30, 2014
INDEX
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PART I |
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Item 1. |
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Business |
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3 |
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Executive
Officers of the Registrant |
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Item 1A. |
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Risk Factors |
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Item 1B. |
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Unresolved Staff
Comments |
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Item 2. |
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Properties |
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Item 3. |
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Legal
Proceedings |
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Item 4. |
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Mine Safety
Disclosures |
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PART II |
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Item 5. |
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Market for
RegistrantŐs Common Equity, Related Stockholder Matters, and Issuer Purchases
of Equity Securities |
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Item 6. |
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Selected
Financial Data |
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Item 7. |
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ManagementŐs
Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. |
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Quantitative and
Qualitative Disclosures about Market Risk |
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Item 8. |
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Financial
Statements and Supplementary Data |
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Item 9. |
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Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure |
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Item 9A. |
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Controls and
Procedures |
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Report of
Management on Internal Control over Financial Reporting |
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Report of
Independent Registered Public Accounting Firm |
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Item 9B. |
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Other Information |
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PART III |
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Item 10. |
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Directors,
Executive Officers and Corporate Governance |
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Item 11. |
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Executive
Compensation |
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Item 12. |
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Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters |
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Item 13. |
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Certain
Relationships and Related Transactions, and Director Independence |
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Item 14. |
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Principal
Accounting Fees and Services |
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PART IV |
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Item 15. |
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Exhibits,
Financial Statement Schedules |
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Signatures |
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Note About Forward-Looking Statements
This
report includes estimates, projections, statements relating to our business
plans, objectives, and expected operating results that are Ňforward-looking
statementsÓ within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. Forward-looking statements may appear
throughout this report, including the following sections: ŇBusiness,Ó
ŇManagementŐs Discussion and Analysis,Ó and ŇRisk Factors.Ó These forward-looking
statements generally are identified by the words Ňbelieve,Ó Ňproject,Ó
Ňexpect,Ó Ňanticipate,Ó Ňestimate,Ó Ňintend,Ó Ňstrategy,Ó Ňfuture,Ó
Ňopportunity,Ó Ňplan,Ó Ňmay,Ó Ňshould,Ó Ňwill,Ó Ňwould,Ó Ňwill be,Ó Ňwill
continue,Ó Ňwill likely result,Ó and similar expressions. Forward-looking
statements are based on current expectations and assumptions that are subject
to risks and uncertainties that may cause actual results to differ materially.
We describe risks and uncertainties that could cause actual results and events
to differ materially in ŇRisk FactorsÓ (Part I, Item 1A of this Form
10-K), ŇQuantitative and Qualitative Disclosures about Market RiskÓ (Part II,
Item 7A), and ŇManagementŐs Discussion and AnalysisÓ (Part II,
Item 7). We undertake no obligation to update or revise publicly any forward-looking
statements, whether because of new information, future events, or otherwise.
PART I
ITEM 1. BUSINESS
GENERAL
Microsoft
was founded in 1975. Our mission is to enable people and organizations throughout
the world to do more and achieve more by creating technology that transforms
the way people learn, work, play, and communicate. We develop and market
software, services, and devices that deliver new opportunities, greater
convenience, and enhanced value to peopleŐs lives. We do business worldwide and
have offices in more than 100 countries.
We
generate revenue by developing, licensing, and supporting a wide range of
software products and services, by designing, manufacturing, and selling
devices, and by delivering relevant online advertising to a global customer
audience. In addition to selling individual products and services, we offer
suites of products and services.
Our
products include operating systems for computing devices, servers, phones, and
other intelligent devices; server applications for distributed computing
environments; productivity applications; business solution applications;
desktop and server management tools; software development tools; video games;
and online advertising. We also design and sell hardware including PCs,
tablets, gaming and entertainment consoles, phones, other intelligent devices,
and related accessories.
We
offer cloud-based solutions that provide customers with software, services, and
content over the Internet by way of shared computing resources located in
centralized data centers. Examples of cloud-based computing services we offer
include Bing, Microsoft Azure, Microsoft Dynamics CRM Online, Microsoft Office
365, OneDrive, Skype, Xbox Live, and Yammer. Cloud revenue is earned primarily
from usage fees, advertising, and subscriptions. We also provide consulting and
product and solution support services, and we train and certify computer system
integrators and developers.
We
conduct research and develop advanced technologies for future software,
devices, and services. We believe that we will continue to grow and meet our
customersŐ needs as the productivity and platform company for the mobile-first
and cloud-first world. We will continue to create new opportunities for
partners, increase customer satisfaction, and improve our service excellence,
business efficacy, and internal processes.
OPERATING SEGMENTS
During
the first quarter of fiscal year 2014, we changed our organizational structure
as part of our transformation to a devices and services company. As a result,
information that our chief operating decision maker regularly reviews for
purposes of allocating resources and assessing performance changed. Therefore,
beginning in fiscal year 2014, we reported our financial performance based on
our new segments: Devices and Consumer (ŇD&CÓ) Licensing, D&C Hardware,
D&C Other, Commercial Licensing, and Commercial Other.
On
April 25, 2014, we completed the transaction to acquire substantially all
of Nokia CorporationŐs (ŇNokiaÓ) Devices and Services Business (ŇNDSÓ). We
report the financial performance of NDS in our new Phone Hardware segment.
Prior to the acquisition of NDS, financial results associated with our joint
strategic initiatives with Nokia were reflected in our D&C Licensing
segment. The contractual relationship with Nokia related to those initiatives
terminated in conjunction with the acquisition. With the creation of the new
Phone Hardware segment, the D&C Hardware segment was renamed Computing and
Gaming Hardware in the fourth quarter of fiscal year 2014.
Our segments provide management with a
comprehensive financial view of our key businesses. The segments enable the
alignment of strategies and objectives across the development, sales,
marketing, and services organizations, and they provide a framework for timely
and rational allocation of development, sales, marketing, and services
resources within businesses. Additional information on our operating segments
and geographic and product information is contained in Note 21 Đ Segment
Information and Geographic Data of the Notes to Financial Statements.
Devices and Consumer
Our
D&C segments develop, manufacture, market, and support products and
services designed to increase personal productivity, help people simplify tasks
and make more informed decisions online, entertain and connect people, and help
advertisers connect with audiences. Our D&C segments are made up of D&C
Licensing, Computing and Gaming Hardware, Phone Hardware, and D&C Other.
D&C Licensing
The
principal products and services provided by the D&C Licensing segment are:
Windows, including original equipment manufacturer (ŇOEMÓ) licensing (ŇWindows
OEMÓ) and other non-volume licensing and academic volume licensing of the
Windows operating system and related software; non-volume licensing of
Microsoft Office, comprising the core Office product set, for consumers
(ŇOffice ConsumerÓ); Windows Phone operating system, including related patent
licensing; and certain other patent licensing revenue.
The Windows operating system is designed to empower individuals, companies, and organizations to simplify everyday tasks through seamless operations across the userŐs hardware and software.
Windows revenue growth is impacted significantly by
the number of Windows operating system licenses purchased by OEMs, which they
pre-install on the devices they sell. In addition to computing device market
volume, Windows revenue is impacted by:
Ą the
mix of computing devices based on form factor and screen size;
Ą differences
in device market demand between developed markets and emerging markets;
Ą attachment
of Windows to devices shipped;
Ą customer
mix between consumer, small and medium sized businesses, and large enterprises;
Ą changes
in inventory levels in the OEM channel;
Ą pricing
changes and promotions, pricing variation that occurs when the mix of devices
manufactured shifts from local and regional system builders to large,
multinational OEMs, and different pricing of Windows versions licensed;
Ą piracy;
and
Ą sales
of packaged software.
The versions of Office included in our D&C
Licensing segment are designed to increase personal productivity through a
range of programs, services, and software solutions. Growth depends on our
ability to add value to the core product set and to continue to expand our
product offerings in other areas such as content management and collaboration.
Office Consumer revenue is impacted by sales to customers that buy Office with
their new devices and by product launches, as well as the transition to Office
365 Consumer, our subscription-based cloud service that provides access to
Office plus other productivity services. Office 365 Consumer revenue is
included in our D&C Other segment.
The
Windows Phone operating system is designed to bring users closer to the people,
applications, and content they need. As noted above, prior to our acquisition
of NDS, Microsoft and Nokia jointly created new mobile products and services
and extended established products and services to new markets through a
strategic alliance. Windows Phone revenue associated with this contractual
relationship was reflected in D&C Licensing. Windows Phone revenue also
includes revenue from licensing mobile-related patents.
Competition
The Windows
operating system faces competition from various software products and from
alternative platforms and devices, mainly from Apple and Google. We believe
Windows competes effectively by giving customers choice, value, flexibility,
security, an easy-to-use interface, compatibility with a broad range of
hardware and software applications, including those that enable productivity,
and the largest support network for any operating system.
Competitors
to the versions of Office included in D&C Licensing include global
application vendors such as Apple and Google, numerous web-based competitors,
and local application developers in Asia and Europe. Apple distributes versions
of its pre-installed application software, such as email, note taking, and
calendar products, through its PCs, tablets, and phones. Google provides a
hosted messaging and productivity suite and distributes its productivity
services through the Android and Chrome operating systems. Web-based offerings
competing with individual applications can also position themselves as
alternatives to our products. We believe our products compete effectively based
on our strategy of providing powerful, flexible, secure, and easy to use
solutions that work across a variety of devices.
Windows
Phone operating system faces competition from iOS, Android, and Blackberry
operating systems. Windows Phone competes based on differentiated user
interface, personalized applications, compatibility with Windows PCs and
tablets, and other unique capabilities.
Computing and
Gaming Hardware
The
principal products and services provided by the Computing and Gaming Hardware
segment are: Xbox gaming and entertainment consoles and accessories,
second-party and third-party video game royalties, and Xbox Live subscriptions
(ŇXbox PlatformÓ); Surface devices and accessories; and Microsoft PC
accessories.
The
Xbox Platform is designed to provide a unique variety of entertainment choices
through the use of our devices, peripherals, content, and online services. We
released Xbox 360 and Xbox One in November 2005 and November 2013,
respectively.
Surface
devices are designed to help organizations, students, and consumers to be more
productive, offering accessories and compatibility with peripherals. Surface
devices were first released in October 2012. Our latest Surface device, the
Surface Pro 3, was released in June 2014.
Competition
Our
Xbox Platform competes with console platforms from Sony and Nintendo, both of
which have a large, established base of customers. The lifecycle for gaming and
entertainment consoles averages five to ten years. Nintendo released their latest
generation console in November 2012. Sony released their latest generation
console in November 2013.
We believe the success of gaming and entertainment
consoles is determined by the availability of games for the console, providing
exclusive game content that gamers seek, the computational power and
reliability of the console, and the ability to create new experiences via
online services, downloadable content, and peripherals. In addition to Sony and
Nintendo, we compete with other providers of entertainment services through
online marketplaces. We believe the Xbox Platform is effectively
positioned against competitive products and services based on significant
innovation in hardware architecture, user interface, developer tools, online
gaming and entertainment services, and continued strong exclusive content from
our own game franchises as well as other digital content offerings.
Surface
devices face competition from computer, tablet, and other hardware
manufacturers, many of which are also current or potential partners and
customers.
Phone Hardware
The
principal products and services provided by the new Phone Hardware segment are Lumia
Smartphones and other non-Lumia phones, which we began manufacturing and
selling with the acquisition of NDS on April 25, 2014.
Competition
Our
phones face competition primarily from Samsung and Apple, as well as many other
mobile device manufacturers. We believe our phones will compete by being
tailored for virtually every demographic and geography worldwide, offering
unique industrial design and imaging technologies at high and low ranges of
price points, and by incorporating MicrosoftŐs digital work and digital life
experiences.
D&C Other
The
principal products and services provided by the D&C Other segment are:
Resale, including the Windows Store, Xbox Live transactions, and the Windows
Phone Store; search advertising; display advertising; Office 365 Consumer,
comprising Office 365 Home and Office 365 Personal; Studios, comprising
first-party video games; and our retail stores.
Windows
Store and Windows Phone Store are online application marketplaces that are
designed to benefit our developers and partner ecosystems by providing access
to a large customer base and benefit users by providing centralized access to
certified applications. Xbox Live transactions consist of online entertainment
content, such as games, music, movies, and TV shows, accessible on Xbox
consoles and other devices.
Search
and display advertising includes Bing, Bing Ads, MSN, Windows Services, and
Xbox ads. We are the exclusive algorithmic and paid search platform for Yahoo!
websites worldwide. We have completed the Yahoo! worldwide algorithmic
transition and the paid search transition in the U.S. and planned international
markets.
Office
365 Consumer is designed to increase personal productivity through a range of
Microsoft Office programs and services delivered across multiple platforms via
the cloud.
Studios
designs and markets games for Xbox consoles, Windows-enabled devices, and
online. Growth depends on our ability to attract new users and increase
engagement by developing a deep library of content which consumers seek.
Competition
We
face competition for our Resale products and services from various online
marketplaces, including those operated by Amazon, Apple, and Google.
Our search and display advertising business
competes with Google and a wide array of websites, social platforms like
Facebook, and portals like Yahoo! that provide content and online offerings to
end users. Our success depends on our ability to attract new users, understand
intent, and match intent with relevant content and advertiser offerings. We
believe we can attract new users by continuing to offer new and compelling
products and services. We differentiate our offerings by providing a broad
selection of content that helps users make faster, informed decisions, and take
action more quickly by providing relevant search results, expanded search
services, and deeply-integrated social recommendations.
Competitors
to Office 365 Consumer are the same as those discussed above for Office
Consumer.
Competitors
to Studios are the same as those discussed above for our Xbox gaming and
entertainment business, as well as game studios like Electronic Arts and
Activision Blizzard.
Commercial
Our
Commercial segments develop, market, and support software and services designed
to increase individual, team, and organization productivity and efficiency, and
to simplify everyday tasks through seamless operations across the userŐs
hardware and software. Commercial is made up of the Commercial Licensing and
Commercial Other segments.
Commercial Licensing
The
principal products and services provided by the Commercial Licensing segment
are: server products, including Windows Server, Microsoft SQL Server, Visual
Studio, System Center, and related Client Access Licenses (ŇCALÓ); Windows
Embedded; volume licensing of the Windows operating system, excluding academic
(ŇWindows CommercialÓ); Microsoft Office for business, including Office,
Exchange, SharePoint, Lync, and related CAL (ŇOffice CommercialÓ); Skype; and
Microsoft Dynamics business solutions, excluding Dynamics CRM Online.
Our
server products are designed to make information technology professionals and
developers and their systems more productive and efficient. Server software is
integrated server infrastructure and middleware designed to support software
applications built on the Windows Server operating system. This includes the
server platform, database, business intelligence, storage, management and
operations, virtualization, service-oriented architecture platform, security,
and identity software. We also license standalone and software development
lifecycle tools for software architects, developers, testers, and project
managers. Revenue comes from product revenue, including purchases through
volume licensing programs, licenses sold to OEMs, and retail packaged product.
CAL provide access rights to certain server and Office products, including
Windows Server, Microsoft SQL Server, Exchange, SharePoint, and Lync. CAL
revenue is reported along with the associated server or Office product.
Windows
Embedded extends the power of Windows and the cloud to intelligent systems,
including the Internet of Things, by delivering specialized operating systems,
tools, and services.
Windows
Commercial revenue is mainly affected by the demand from commercial customers
for volume licensing and software assurance, often reflecting the number of
information workers in a licensed enterprise, and is therefore relatively
independent of the number of PCs sold in a given year.
The
versions of Office in Commercial Licensing are designed to increase personal,
team and organizational productivity through a range of programs, services, and
software solutions. Office Commercial revenue is mainly affected by a
combination of the demand from commercial customers for volume licensing and
software assurance and the number of information workers in a licensed
enterprise, and is therefore relatively independent of the number of PCs sold
in a given year.
Skype
is designed to connect friends, family, clients, and colleagues through a
variety of devices. Revenue is largely driven by the sale of minutes,
subscriptions, and advertising.
Microsoft Dynamics products provide business
solutions for financial management, customer relationship management, supply
chain management, and analytics applications for small and mid-size businesses,
large organizations, and divisions of global enterprises. Revenue is largely
driven by the number of information workers licensed.
Competition
Our
server operating system products face competition from a wide variety of server
operating systems and applications offered by companies with a range of market
approaches. Vertically integrated computer manufacturers such as Hewlett-Packard,
IBM, and Oracle offer their own versions of the Unix operating system
preinstalled on server hardware. Nearly all computer manufacturers offer server
hardware for the Linux operating system and many contribute to Linux operating
system development. The competitive position of Linux has also benefited from
the large number of compatible applications now produced by many commercial and
non-commercial software developers. A number of companies, such as Red Hat,
supply versions of Linux.
We
compete to provide enterprise-wide computing solutions and point solutions with
numerous commercial software vendors that offer solutions and middleware
technology platforms, software applications for connectivity (both Internet and
intranet), security, hosting, database, and e-business servers. IBM and Oracle
lead a group of companies focused on the Java Platform Enterprise Edition that
compete with our enterprise-wide computing solutions. Commercial competitors
for our server applications for PC-based distributed client/server environments
include CA Technologies, IBM, and Oracle. Our web application platform software
competes with open source software such as Apache, Linux, MySQL, and PHP. In
middleware, we compete against Java middleware such as Geronimo, Wildfly, and
Spring Framework.
Our
system management solutions compete with server management and server
virtualization platform providers, such as BMC, CA Technologies,
Hewlett-Packard, IBM, and VMware. Our database, business intelligence, and data
warehousing solutions offerings compete with products from IBM, Oracle, SAP,
and other companies. Our products for software developers compete against
offerings from Adobe, IBM, Oracle, other companies, and open-source projects,
including Eclipse (sponsored by CA Technologies, IBM, Oracle, and SAP), PHP,
and Ruby on Rails, among others.
Our
embedded systems compete in a highly fragmented environment in which key
competitors include IBM, Intel, and versions of embeddable Linux from
commercial Linux vendors such as Metrowerks and MontaVista Software.
We
believe our server products provide customers with advantages in performance,
total costs of ownership, and productivity by delivering superior applications,
development tools, compatibility with a broad base of hardware and software
applications, security, and manageability.
Competitors
to Windows Commercial are the same as those discussed above for Windows in the
D&C Licensing segment.
Office
Commercial revenue growth depends on our ability to add value to the core
product set and to continue to expand our product offerings in other areas such
as content management, enterprise search, collaboration, unified
communications, and business intelligence. Competitors to Office Commercial
includes software application vendors such as Adobe Systems, Apple, Cisco
Systems, Google, IBM, Oracle, SAP, and numerous web-based competitors as well
as local application developers in Asia and Europe. Cisco Systems is using its
position in enterprise communications equipment to grow its unified
communications business. Google provides a hosted messaging and productivity
suite. Web-based offerings competing with individual applications can also
position themselves as alternatives to our products. We believe our products
compete effectively based on our strategy of providing powerful, flexible,
secure, easy to use solutions that work well with technologies our customers
already have and are available on a device or via the cloud.
Skype
competes with a variety of instant messaging, voice, and video communication
providers, ranging from start-ups to established enterprises.
Our Microsoft Dynamics products compete with
vendors such as Oracle and SAP in the market for large organizations and
divisions of global enterprises. In the market focused on providing solutions
for small and mid-sized businesses, our Microsoft Dynamics products compete
with vendors such as Infor, The Sage Group, and NetSuite. Salesforce.comŐs
cloud CRM offerings compete directly with Microsoft Dynamics CRM on-premises
offerings.
Commercial Other
The
principal products and services provided by the Commercial Other segment are:
Enterprise Services, including Premier product support services and Microsoft
Consulting Services; Commercial Cloud, comprising Office 365 Commercial, other
Microsoft Office online offerings, Dynamics CRM Online, and Microsoft Azure.
Enterprise
Services, including Premier product support services and Microsoft Consulting
Services assist customers in developing, deploying, and managing Microsoft
server and desktop solutions and provide training and certification to
developers and information technology professionals on various Microsoft
products.
Office
365 Commercial is an online services offering that includes Microsoft Office,
Exchange, SharePoint, and Lync, and is available across a variety of devices
and platforms.
Dynamics
CRM Online is designed to provide customer relationship management and supply
chain management for small and mid-size businesses, large organizations, and
divisions of global enterprises. Revenue is largely driven by the number of
information workers licensed.
Microsoft
Azure is a scalable operating system with computing, storage, database, and
management, along with comprehensive cloud solutions, from which customers can
build, deploy, and manage enterprise workloads and web applications. These
services also include a platform that helps developers build and connect
applications and services in the cloud. Our goal is to enable customers to
devote more resources to development and use of applications that benefit their
businesses, rather than managing on-premises hardware and software.
Competition
The
Enterprise Services business competes with a wide range of companies that
provide strategy and business planning, application development, and
infrastructure services, including multinational consulting firms and small
niche businesses focused on specific technologies.
Competitors
to Office 365 Commercial are the same as those discussed above for Office
Commercial.
Microsoft
Dynamics CRMŐs online offerings primarily compete with Salesforce.comŐs
on-demand CRM offerings.
Microsoft
Azure faces diverse competition from companies such as Amazon, Google, IBM,
Oracle, Salesforce.com, VMware, and other open source offerings.
OPERATIONS
We
have operations centers that support all operations in their regions, including
customer contract and order processing, credit and collections, information
processing, and vendor management and logistics. The regional center in Ireland
supports the European, Middle Eastern, and African region; the center in
Singapore supports the Japan, India, Greater China, and Asia-Pacific region;
and the centers in Fargo, North Dakota, Fort Lauderdale, Florida, Puerto Rico,
Redmond, Washington, and Reno, Nevada support Latin America and North America.
In addition to the operations centers, we also operate data centers throughout
the Americas, Europe, and Asia regions.
To
serve the needs of customers around the world and to improve the quality and
usability of products in international markets, we localize many of our
products to reflect local languages and conventions. Localizing a product may
require modifying the user interface, altering dialog boxes, and translating
text.
Our Xbox consoles and games, Surface devices, and Microsoft
PC accessories are manufactured by third party contract manufacturers. We
generally have the ability to use other manufacturers if the current vendor
becomes unavailable or unable to meet our requirements.
With the
acquisition of NDS, we now operate manufacturing facilities for the production
and customization of phones in Brazil, China, Hungary, Mexico, and Vietnam.
All our devices may include key components that are
available from only one or limited sources. Disruption of component supply from
these suppliers could potentially lead to a disruption of production of certain
devices.
RESEARCH AND DEVELOPMENT
During
fiscal years 2014, 2013, and 2012, research and development expense was $11.4
billion, $10.4 billion, and $9.8 billion, respectively. These amounts
represented 13% of revenue in each of those years. We plan to continue to make
significant investments in a broad range of research and development efforts.
Product and Service Development and
Intellectual Property
We
develop most of our products and services internally through four primary
engineering groups.
Ą Applications and Services Engineering Group,
focuses on broad applications and services core technologies in productivity,
communication, search, and other information categories.
Ą Cloud and Enterprise Engineering Group,
focuses on development of MicrosoftŐs back-end technologies like datacenter,
database, and our specific technologies for enterprise IT scenarios and
development tools. This group also engineers datacenter development,
construction, and operation.
Ą Devices Engineering Group, focuses on
all hardware development and supply chain, including Xbox consoles, Surface
devices, Lumia Smartphones, other non-Lumia phones, Perceptive Pixel products, and
accessories.
Ą Operating Systems Engineering Group,
focuses on MicrosoftŐs operating systems for consoles, mobile devices, PCs, and
back-end systems. Studios and Universal Store, the core cloud services for marketplaces,
membership, and commerce platform, are also in this group.
Internal
development allows us to maintain competitive advantages that come from product
differentiation and closer technical control over our products and services. It
also gives us the freedom to decide which modifications and enhancements are
most important and when they should be implemented. We strive to obtain
information as early as possible about changing usage patterns and hardware
advances that may affect software design. Before releasing new software
platforms, we provide application vendors with a range of resources and
guidelines for development, training, and testing. Generally, we also create
product documentation internally.
We
protect our intellectual property investments in a variety of ways. We work
actively in the U.S. and internationally to ensure the enforcement of
copyright, trademark, trade secret, and other protections that apply to our
software and hardware products, services, business plans, and branding. We are
a leader among technology companies in pursuing patents and currently have a
portfolio of over 55,000 U.S. and international patents issued and over 40,000
pending. While we employ much of our internally developed intellectual property
exclusively in Microsoft products and services, we also engage in outbound and
inbound licensing of specific patented technologies that are incorporated into
licenseesŐ or MicrosoftŐs products. From time to time, we enter into broader
cross-license agreements with other technology companies covering entire groups
of patents. We also purchase or license technology that we incorporate into our
products or services. At times, we make select intellectual property broadly
available at no or low cost to achieve a strategic objective, such as promoting
industry standards, advancing interoperability, or attracting and enabling our
external development community. In conjunction with the NDS acquisition, we
received an initial 10-year non-exclusive license to certain Nokia patents. We
also agreed to license NokiaŐs mapping services and granted Nokia reciprocal
rights to use our patents for their mapping and location services.
While
it may be necessary in the future to seek or renew licenses relating to various
aspects of our products and business methods, we believe, based upon past
experience and industry practice, such licenses generally could be obtained on
commercially reasonable terms. We believe our continuing research and product
development are not materially dependent on any single license or other
agreement with a third party relating to the development of our products.
Investing in the Future
MicrosoftŐs
success is based on our ability to create new and compelling products,
services, and experiences for our users, to initiate and embrace disruptive
technology trends, to enter new geographic and product markets, and to drive
broad adoption of our products and services. We invest in a range of emerging
technology trends and breakthroughs that we believe offer significant
opportunities to deliver value to our customers and growth for the company. We
maintain our long-term commitment to research and development across a wide
spectrum of technologies, tools, and platforms spanning communication and
collaboration, information access and organization, entertainment, business and
e-commerce, advertising, and devices.
While
our main research and development facilities are located in Redmond,
Washington, we also operate research and development facilities in other parts
of the U.S. and around the world, including Canada, China, Denmark, Estonia,
Finland, India, Ireland, Israel, Norway, Sweden, Taiwan, and the United
Kingdom. This global approach helps us remain competitive in local markets and
enables us to continue to attract top talent from across the world. We
generally fund research at the corporate level to ensure that we are looking
beyond immediate product considerations to opportunities further in the future.
We also fund research and development activities at the business segment level.
Much of our business segment level research and development is coordinated with
other segments and leveraged across the company.
In
addition to our main research and development operations, we also operate
Microsoft Research. Microsoft Research is one of the worldŐs largest computer
science research organizations, and works in close collaboration with top
universities around the world to advance the state-of-the-art in computer
science, providing us a unique perspective on future technology trends and
contributing to our product and service innovation.
Based
on our assessment of key technology trends and our broad focus on long-term
research and development, we see significant opportunities to drive future
growth in productivity, platforms, cloud computing, search, communications, and
smart connected devices.
DISTRIBUTION, SALES, AND MARKETING
We
market and distribute our products and services primarily through the following
channels: OEMs; distributors and resellers; online; and Microsoft retail stores.
OEMs
We
distribute software through OEMs that pre-install our software on new PCs,
tablets, servers, smartphones, and other intelligent devices that they sell to
end customers. The largest component of the OEM business is the Windows
operating system pre-installed on computing devices. OEMs also sell hardware
pre-installed with other Microsoft products, including server and embedded
operating systems and applications such as our Microsoft Office suite. In
addition to these products, we also market our services through OEMs and
service bundles such as Windows with Bing or Windows with Office 365
subscription.
There are two broad categories of OEMs. The largest
OEMs, many of which operate globally, are referred to as ŇDirect OEMs,Ó as our
relationship with them is managed through a direct agreement between Microsoft
and the OEM. We have distribution agreements covering one or more of our
products with virtually all of the multinational OEMs, including Acer, ASUS,
Dell, Fujitsu, HTC, Hewlett-Packard, LG, Lenovo, Samsung, Sony, Toshiba, and
with many regional and local OEMs. The second broad category of OEMs consists
of lower-volume PC manufacturers (also called Ňsystem buildersÓ), which source
their Microsoft software for pre-installation and local redistribution
primarily through the Microsoft distributor channel rather than through a
direct agreement or relationship with Microsoft.
Distributors and Resellers
Many
organizations that license our products and services through enterprise
agreements transact directly with us, with sales support from solution
integrators, independent software vendors, web agencies, and developers that
advise organizations on licensing our products and services (ŇEnterprise Agreement
Direct AdvisorsÓ, or ŇEDAsÓ). Organizations also license our products and
services indirectly, primarily through license solutions partners (ŇLSPsÓ),
distributors, value-added resellers (ŇVARsÓ), OEMs, system builder channels,
and retailers. Although each type of reselling partner reaches organizations of
all sizes, LSPs are primarily engaged with large organizations, distributors
resell primarily to VARs, and VARs typically reach small-sized and medium-sized
organizations. EDAs typically are also authorized as LSPs and operate as
resellers for our other licensing programs, such as the Select Plus and Open
licensing programs discussed under ŇLicensing OptionsÓ below. Some of our
distributors include Ingram Micro and Tech Data, and some of our largest
resellers include CDW, Dell, Insight Enterprises, and Software House
International.
Our
Microsoft Dynamics software offerings are also licensed to enterprises through
a global network of channel partners providing vertical solutions and
specialized services. We distribute our retail packaged products primarily
through independent non-exclusive distributors, authorized replicators,
resellers, and retail outlets. Individual consumers obtain these products
primarily through retail outlets, such as Wal-Mart, Dixons, and Microsoft
retail stores. We distribute our hardware products, including Surface, Xbox,
phones, and PC accessories, through third-party retailers and Microsoft retail
stores. Our phones are also distributed through global wireless communications
carriers. We have a network of field sales representatives and field support
personnel that solicits orders from distributors and resellers, and provides
product training and sales support.
Online
Although
on-premises software will continue to be an important part of our business,
increasingly we are delivering additional value to customers through
cloud-based services. We provide online content and services to consumers
through Bing, MSN portals and channels, Office 365, Windows Phone Store, Xbox
Live, Outlook.com, Skype, and Windows Store. We also provide commercial
cloud-based services such as Microsoft Dynamics CRM Online, Microsoft Azure,
and Office 365 consisting of online versions of Microsoft Office, Exchange,
SharePoint, Lync, and Yammer. Other services delivered online include our
online advertising platform with offerings for advertisers and publishers, as
well as Microsoft Developer Network subscription content and updates, periodic
product updates, and online technical and practice readiness resources to support
our partners in developing and selling our products and solutions. As we
increasingly deliver online services, we sell many of these cloud-based
services through our enterprise agreements and have also enabled new sales
programs to reach small and medium-sized businesses. These new programs
include direct sales, direct sales supported by a large network of partner
advisors, and resell of services through operator channels, such as telephone,
cell, and cable providers.
We
also sell our products through our Microsoft retail stores and online
marketplaces.
LICENSING OPTIONS
We
license software to organizations under agreements that allow the customer to
acquire multiple licenses of products and services. Our agreements for
organizations to acquire multiple licenses of products and services are
designed to provide them with a means of doing so without having to acquire
separate licenses through retail channels. In delivering organizational
licensing agreements to the market, we use different programs designed to
provide flexibility for organizations of various sizes. While these programs
may differ in various parts of the world, generally they include those
discussed below.
Customer Licensing Programs
Open Licensing
Designed
primarily for small-to-medium organizations, Open Programs allows customers to
acquire perpetual or subscription licenses and, at the customerŐs election,
rights to future versions of software products over a specified time period
(two or three years depending on the Open Programs used). The offering that
conveys rights to future versions of certain software products over the
contract period is called software assurance. Software assurance also provides
support, tools, and training to help customers deploy and use software
efficiently. Open Programs has several variations to fit customersŐ diverse way
of purchasing. Under the Open Program, customers can acquire licenses only or
licenses with software assurance. They can also renew software assurance upon
the expiration of existing volume licensing agreements. Office 365 is also
available for purchase through the Open Program.
Select Plus Licensing
Designed
primarily for medium-to-large organizations, the Select Plus Program allows
customers to acquire perpetual licenses and, at the customerŐs election,
software assurance over a specified time period (generally three years or
less). Similar to Open Programs, the Select Plus Program allows customers to
acquire licenses only, acquire licenses with software assurance, or renew
software assurance upon the expiration of existing volume licensing agreements.
A subset of online services are also available for purchase through the Select
Plus Program, and subscriptions are generally structured with terms between one
and three years.
Enterprise Agreement Licensing
Designed
primarily for medium- and large-sized organizations that want to acquire
licenses to Online Services and/or software products, along with software
assurance, for all or substantial parts of their enterprise. Enterprises can
elect to acquire perpetual licenses or, under the Enterprise Subscription
Program, can acquire non-perpetual, subscription agreements for a specified
time period (generally three years). Online Services are also available for
purchase through the enterprise agreement and subscriptions are generally structured
with three year terms.
Customer Licensing Programs - Online
Services Only
Microsoft
Online Subscription Agreement is designed to enable small and medium-sized
businesses to easily purchase Microsoft Online Services (excluding Azure). The
program allows customers to acquire monthly or annual subscriptions for
cloud-based services.
Microsoft
Azure Agreement is designed to enable small and medium-sized businesses to
purchase Microsoft Azure Subscription plans on a Ňpay-as-you-goÓ basis.
Partner Programs
The
Microsoft Services Provider License Agreement is a program targeted at service
providers and Independent Software Vendors allowing these partners to provide
software services and hosted applications to their end customers. Agreements
are generally structured with a three-year term, and partners are billed
monthly based upon consumption.
Microsoft
Online Services Reseller Agreement is a program enabling partners to package
Microsoft Online Services with the partnersŐ services.
Independent Software Vendor Royalty Program
is a program that enables partners to use Microsoft software in their own
software programs.
CUSTOMERS
Our
customers include individual consumers, small- and medium-sized organizations,
enterprises, governmental institutions, educational institutions, Internet
service providers, application developers, and OEMs. Consumers and small and
medium-sized organizations obtain our products primarily through distributors,
resellers, and OEMs. No sales to an individual customer accounted for more than
10% of fiscal year 2014, 2013, or 2012 revenue. Our practice is to ship our
products promptly upon receipt of purchase orders from customers; consequently,
backlog is not significant.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive
officers as of July 25, 2014 were as follows:
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Name |
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Age |
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Position with the Company |
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Satya Nadella |
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46 |
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Chief
Executive Officer |
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Lisa E. Brummel |
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54 |
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Executive
Vice President, Human Resources |
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Christopher C. Capossela |
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44 |
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Executive Vice
President, Chief Marketing Officer |
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Amy E. Hood |
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42 |
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Executive Vice
President, Chief Financial Officer |
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Bradford L. Smith |
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55 |
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Executive Vice
President, General Counsel; Secretary |
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B. Kevin Turner |
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49 |
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Chief Operating
Officer |
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Mr. Nadella
was appointed Chief Executive Officer in February 2014. He served as Executive
Vice President, Cloud and Enterprise since July 2013. From 2011 to 2013,
Mr. Nadella served as President, Server and Tools. From 2009 to 2011, he
was Senior Vice President, Online Services Division. From 2008 to 2009, he was
Senior Vice President, Search, Portal, and Advertising. Since joining Microsoft
in 1992, Mr. NadellaŐs roles have also included Vice President of Microsoft
Business Division.
Ms. Brummel
was appointed Executive Vice President, Human Resources in July 2013, after
serving as Chief People Officer since 2011 and Senior Vice President, Human
Resources beginning in 2005. Prior to that she had been Corporate Vice
President, Human Resources since May 2005. From 2000 to 2005, she had been
Corporate Vice President of the Home and Retail Division. Since
joining Microsoft in 1989, Ms. Brummel has held a number of management
positions at Microsoft, including General Manager of Consumer Productivity
Business, Product Unit Manager of the Kids Business, and Product Unit Manager
of Desktop and Decision Reference Products.
Mr. Capossela
was appointed Executive Vice President, Chief Marketing Officer in March
2014. Prior to that he served as the worldwide leader of the Consumer
Channels Group, responsible for sales and marketing activities with OEMs,
operators, and retail partners. In his more than 20 years at Microsoft,
Mr. Capossela has held a variety of marketing leadership roles in the
Microsoft Office Division. He was responsible for marketing productivity
solutions including Microsoft Office, Office 365, SharePoint, Exchange, Lync,
Project, and Visio.
Ms. Hood
was appointed Executive Vice President and Chief Financial Officer in July
2013, subsequent to her appointment as Chief Financial Officer in May 2013.
Beginning in 2010, Ms. Hood was Chief Financial Officer of the Microsoft
Business Division. From 2006 through 2009, Ms. Hood was General Manager,
Microsoft Business Division Strategy. Since joining Microsoft in 2002,
Ms. Hood has also held finance-related positions in the Server and Tools
Business and the corporate finance organization.
Mr. Smith
was appointed Executive Vice President, General Counsel, and Secretary in 2011.
Prior to that he served as Senior Vice President, General Counsel, and
Secretary since November 2001. Mr. Smith was also named Chief Compliance
Officer in 2002. He had been Deputy General Counsel for Worldwide Sales and
previously was responsible for managing the European Law and Corporate Affairs
Group, based in Paris. Mr. Smith joined Microsoft in 1993.
Mr. Turner was appointed Chief Operating
Officer in September 2005. Before joining Microsoft, he was Executive Vice
President of Wal-Mart Stores, Inc. and President and Chief Executive Officer of
the SamŐs Club division. From 2001 to 2002, he served as Executive Vice
President and Chief Information Officer of Wal-MartŐs Information Systems
Division. From 2000 to 2001, he served as its Senior Vice President and Chief
Information Officer of the Information Systems Division. Mr. Turner also
serves on the Board of Directors of Nordstrom, Inc.
EMPLOYEES
As of June 30, 2014, we employed approximately 128,000 people on a
full-time basis, 62,000 in the U.S. and 66,000 internationally, including
approximately 25,000 employees transferred as part of the NDS acquisition in
April 2014. Of the total employed people, 44,000 were in product research and
development, 30,000 in sales and marketing, 23,000 in product support and
consulting services, 20,000 in manufacturing and distribution, and 11,000 in
general and administration. In July 2014, we announced a restructuring plan
which will eliminate up to 18,000 positions in fiscal year 2015, including
12,500 professional and factory positions related to the acquisition of NDS. As
a result of the NDS acquisition, we have certain employees that are subject to
collective bargaining agreements.
AVAILABLE INFORMATION
Our Internet
address is www.microsoft.com. At our Investor Relations website,
www.microsoft.com/investor, we make available free of charge a variety of
information for investors. Our goal is to maintain the Investor Relations
website as a portal through which investors can easily find or navigate to
pertinent information about us, including:
Ą our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments
to those reports, as soon as reasonably practicable after we electronically
file that material with or furnish it to the Securities and Exchange Commission
(ŇSECÓ);
Ą information on our
business strategies, financial results, and key performance indicators;
Ą announcements of investor
conferences, speeches, and events at which our executives talk about our product,
service, and competitive strategies. Archives of these events are also
available;
Ą press releases on quarterly
earnings, product and service announcements, legal developments, and
international news;
Ą corporate governance information
including our articles of incorporation, bylaws, governance guidelines,
committee charters, codes of conduct and ethics, global corporate citizenship
initiatives, and other governance-related policies;
Ą other
news and announcements that we may post from time to time that investors might
find useful or interesting; and
Ą opportunities
to sign up for email alerts and RSS feeds to have information pushed in real
time.
The
information found on our website is not part of this or any other report we
file with, or furnish to, the SEC. In addition to these channels, we use social
media to communicate to the public. It is possible that the information we post
on social media could be deemed to be material to investors. We encourage
investors, the media, and others interested in Microsoft to review the
information we post on the social media channels listed on our Investor
Relations website.
ITEM 1A. RISK FACTORS
Our
operations and financial results are subject to various risks and
uncertainties, including those described below, that could adversely affect our
business, financial condition, results of operations, cash flows, and the
trading price of our common stock.
We face intense competition
across all markets for our products and services, which may lead to lower
revenue or operating margins.
Competition in the technology sector
Our
competitors range in size from diversified global companies with significant
research and development resources to small, specialized firms whose narrower
product lines may let them be more effective in deploying technical, marketing,
and financial resources. Barriers to entry in our businesses are low and
software products can be distributed broadly and quickly at relatively low
cost. Many of the areas in which we compete evolve rapidly with changing and
disruptive technologies, shifting user needs, and frequent introductions of new
products and services. Our ability to remain competitive depends on our success
in making innovative products, devices, and services that appeal to businesses
and consumers.
Competition among platforms, ecosystems, and
devices
An
important element of our business model has been to create platform-based ecosystems
on which many participants can build diverse solutions. A well-established
ecosystem creates beneficial network effects among users, application
developers, and the platform provider that can accelerate growth. Establishing
significant scale in the marketplace is necessary to achieve and maintain
attractive margins. The strategic importance of developing and maintaining a
vibrant ecosystem increased with the launch of the Windows 8 operating system,
Surface, Windows Phone, Xbox One, and associated cloud-based services. We face
significant competition from firms that provide competing platforms,
applications, and services.
Ą A
competing vertically-integrated model, in which a single firm controls the
software and hardware elements of a product and related services, has succeeded
with some consumer products such as personal computers, tablets, phones, gaming
consoles, and digital music players. Competitors pursuing this model also earn
revenue from services integrated with the hardware and software platform. We
also offer some vertically-integrated hardware and software products and
services; however, our competitors in smartphones and tablets have established
significantly larger user bases. Competing with the vertically integrated model
will increase our cost of revenue and reduce our operating margins.
Ą We
derive substantial revenue from licenses of Windows operating systems on
personal computers. We face significant competition from competing platforms
developed for new devices and form factors such as smartphones and tablet
computers. These devices compete on multiple bases including price and the
perceived utility of the device and its platform. Users are increasingly turning
to these devices to perform functions that in the past were performed by
personal computers. Even if many users view these devices as complementary to a
personal computer, the prevalence of these devices may make it more difficult
to attract application developers to our platforms. Competing operating systems
licensed at low or no cost may decrease PC operating system margins. In
addition, Surface competes with products made by our OEM partners, which may
affect their commitment to our platform.
Ą The
success of the Windows phone platform is an important element of our goal to
enhance personal productivity in a mobile-first and cloud-first world. The
marketplace among mobile phone platforms is highly competitive. We may face
issues in selecting, engaging or securing support from operators and retailers
for Windows phones due to, for instance, inadequate sales training or
incentives, or insufficient marketing support for the Windows Phone platform.
Ą Competing
platforms have application marketplaces (sometimes referred to as ŇstoresÓ)
with scale and significant installed bases on mobile devices. The variety and
utility of applications available on a platform is important to device
purchasing decisions. Users incur costs to move data and buy new applications when
switching platforms. To compete, we must successfully enlist developers to
write applications for our marketplace and ensure that these applications have
high quality, customer appeal, and value. Efforts to compete with these
application marketplaces may increase our cost of revenue and lower our
operating margins.
Business model competition
Companies
compete with us based on a growing variety of business models.
Ą Even
as we transition to a mobile-first and cloud-first strategy, the license-based
proprietary software model generates most of our software revenue. We bear the costs of converting original
ideas into software products through investments in research and development,
offsetting these costs with the revenue received from licensing our products.
Many of our competitors also develop and sell software to businesses and
consumers under this model.
Ą Other
competitors develop and offer free applications, online services and content,
and make money by selling third-party advertising. Advertising revenue funds
development of products and services these competitors provide to users at no
or little cost, competing directly with our revenue-generating products.
Ą Some
companies compete with us using an open source business model by modifying and
then distributing open source software at nominal cost to end-users and earning
revenue on advertising or complementary services and products. These firms do
not bear the full costs of research and development for the software. Some open
source software vendors develop software that mimics the features and
functionality of our products.
The
competitive pressures described above may cause decreased sales volumes, price
reductions, and/or increased operating costs, such as for research and
development, marketing, and sales incentives. This may lead to lower revenue,
gross margins, and operating income.
Our increasing focus on services presents execution
and competitive risks. A growing part of our business involves
cloud-based services available across the spectrum of computing devices. In
July 2014, our leadership announced its strategic vision to compete and grow as
a productivity and platform company for
the mobile-first and cloud-first world. At the same time, our competitors
are rapidly developing and deploying cloud-based services for consumers and
business customers. Pricing and delivery models are evolving. Devices and form
factors influence how users access services in the cloud and sometimes the
userŐs choice of which suite of cloud-based services to use. We are devoting
significant resources to develop and deploy our cloud-based strategies. The
Windows ecosystem must continue to evolve with this changing environment. We are embracing cultural and organizational
changes to drive accountability and eliminate obstacles to innovation. Besides
software development costs, we are incurring costs to build and maintain
infrastructure to support cloud computing services. These costs will reduce the
operating margins we have previously achieved. Whether we succeed in cloud-based
services depends on our execution in several areas, including:
Ą continuing
to bring to market compelling cloud-based experiences that generate increasing
traffic and market share;
Ą maintaining
the utility, compatibility, and performance of our cloud-based services on the
growing array of computing devices, including PCs, smartphones, tablets, and
television-related devices, including gaming consoles;
Ą continuing
to enhance the attractiveness of our cloud platforms to third-party developers;
Ą ensuring
our cloud-based services meet the reliability expectations of our customers and
maintain the security of their data; and
Ą making
our suite of cloud-based services platform agnostic, available on a wide range
of devices and ecosystems, including those of our competitors.
It
is uncertain whether our strategies will attract the users or generate the
revenue required to succeed. If we
are not effective in executing organizational changes to increase efficiency
and accelerate innovation, or if we fail to generate sufficient usage of our
new products and services, we may not grow revenues in line with the
infrastructure and development investments described above. This may negatively
impact gross margins and operating income.
We make significant investments in new products and
services that may not be profitable. We will continue to make
significant investments in research, development, and marketing for existing
products, services, and technologies, including the Windows operating system,
the Microsoft Office system, Bing, Windows Phone, Windows Server, the Windows Store,
the Microsoft Azure Services platform, Office 365, other cloud-based services
offerings, and the Xbox entertainment platform. We also invest in the
development and acquisition of a variety of hardware for productivity,
communication and entertainment including PCs, tablets, phones, and gaming
devices. Investments in new technology are speculative. Commercial success
depends on many factors, including innovativeness, developer support, and
effective distribution and marketing. If customers do not perceive our latest
offerings as providing significant new functionality or other value, they may
reduce their purchases of new software and hardware products or upgrades,
unfavorably affecting revenue. We may not achieve significant revenue from new
product, service, and distribution channel investments for several years, if at
all. New products and services may not be profitable, and even if they are
profitable, operating margins for some new products and businesses will not be
as high as the margins we have experienced historically.
Developing new
technologies is complex and time-consuming. It can require long development and
testing periods. Significant delays in new releases or significant problems in
creating new products or services could adversely affect our revenue.
Acquisitions, joint ventures, and strategic alliances may have an
adverse effect on our business. We expect to continue
making acquisitions or entering into joint ventures and strategic alliances as
part of our long-term business strategy. These transactions involve significant
challenges and risks including that the transaction does not advance our
business strategy, that we get no satisfactory return on our investment, that
we have difficulty integrating new employees, business systems, and technology,
or that the transaction distracts management from our other businesses. The
success of these transactions will depend in part on our ability to leverage
them enhance our existing products and services or develop compelling new ones.
It may take longer than expected to realize the full benefits from these
transactions, such as increased revenue, enhanced efficiencies, or increased
market share, or the benefits may ultimately be smaller than we expected. These
events could adversely affect our operating results or financial condition.
In April 2014, we acquired from Nokia
substantially all of its NDS business to accelerate our growth in phones and
support the entire Windows ecosystem. We may not realize all of the anticipated
financial and other benefits from this transaction including operating
efficiencies and cost savings. We may not be successful in developing a vibrant
and competitive ecosystem for Windows-based phones that combines differentiated
hardware, software, services, and third-party applications. We may not achieve
mobile phone market share targets. We may see lower than expected growth rates
for the phone markets. The mix of premium and lower-cost devices we sell may
put downward pressure on prices or margins. We may not be effective in
executing the restructuring we announced in July 2014 or otherwise integrating
the NDS business with MicrosoftŐs ongoing operations, including matching
manufacturing capacity to demand. Existing Microsoft smart device original
equipment manufacturers may respond negatively to the changes in our business
or the new competitive environment.
If our goodwill or amortizable intangible
assets become impaired we may be required to record a significant charge to
earnings. We acquire other
companies and intangible assets and may not realize all the economic benefit
from those acquisitions, which could cause an impairment of goodwill or
intangibles. We review our amortizable intangible assets for impairment when
events or changes in circumstances indicate the carrying value may not be
recoverable. We test goodwill for impairment at least annually. Factors that
may be a change in circumstances, indicating that the carrying value of our
goodwill or amortizable intangible assets may not be recoverable, include a
decline in our stock price and market capitalization, reduced future cash flow
estimates, and slower growth rates in industry segments in which we
participate. We may be required to record a significant charge in our consolidated
financial statements during the period in which any impairment of our goodwill
or amortizable intangible assets is determined, negatively affecting our
results of operations. For example, in the fourth quarter of fiscal year 2012,
we recorded a $6.2 billion charge for the impairment of goodwill in our
previous Online Services Division business (Devices and Consumer Other under
our current segment structure).
The valuation of
acquired assets and liabilities, including goodwill, resulting from the
acquisition of NDS, is reflective of the enterprise value based on the
long-term financial forecast for the business. In this highly competitive
and volatile market, we may not realize our forecasts. As a result, we may be
required to record a significant charge to earnings in our consolidated
financial statements due to an impairment of our goodwill or amortizable
intangible assets.
We may not be able to adequately protect our intellectual property
rights. Protecting
our global intellectual property rights and combating unlicensed copying and
use of our software and other intellectual property is difficult. While piracy
adversely affects U.S. revenue, the impact on revenue from outside the U.S. is
more significant, particularly in countries where laws are less protective of
intellectual property rights. Our revenue in these markets may grow slower than
the underlying device market. Similarly, the absence of harmonized patent laws
makes it more difficult to ensure consistent respect for patent rights.
Throughout the world, we educate consumers about the benefits of licensing
genuine products and obtaining indemnification benefits for intellectual
property risks, and we educate lawmakers about the advantages of a business
climate where intellectual property rights are protected. Reductions in the
legal protection for software intellectual property rights could adversely
affect revenue.
Third parties may claim we infringe their
intellectual property rights. From time to time, others
claim we infringe their intellectual property rights. The number of these
claims may grow because of constant technological change in the markets in
which we compete, the extensive patent coverage of existing technologies, the
rapid rate of issuance of new patents, and our offering of first-party devices,
such as Surface and Lumia phones. To resolve these claims we may enter into
royalty and licensing agreements on terms that are less favorable than
currently available, stop selling or redesign affected products or services, or
pay damages to satisfy indemnification commitments with our customers. These
outcomes may cause operating margins to decline. Besides money damages, in some
jurisdictions plaintiffs can seek injunctive relief that may limit or prevent
importing, marketing, and selling our products or services that have infringing
technologies. In some countries, such as Germany, an injunction can be issued
before the parties have fully litigated the validity of the underlying patents.
We have paid significant amounts to settle claims related to the use of
technology and intellectual property rights and to procure intellectual
property rights as part of our strategy to manage this risk, and may continue
to do so.
We may not be able to protect our source code from copying if there is
an unauthorized disclosure of source code. Source code, the
detailed program commands for our operating systems and other software
programs, is critical to our business. Although we license portions of our
application and operating system source code to several licensees, we take
significant measures to protect the secrecy of large portions of our source
code. If a significant portion of our source code leaks, we might lose future
trade secret protection for that source code. It may become easier for third
parties to compete with our products by copying functionality, which could
adversely affect our revenue and operating margins. Unauthorized disclosure of
source code also could increase the security risks described in the next
paragraph.
Cyber-attacks and security vulnerabilities
could lead to reduced revenue, increased costs, liability claims, or harm to
our competitive position.
Security of MicrosoftŐs information technology
Threats
to information technology (ŇITÓ) security can take a variety of forms.
Individual and groups of hackers, and sophisticated organizations including
state-sponsored organizations, may take steps that pose threats to our
customers and our IT. They may develop and deploy malicious software to
attack our products and services and gain access to our networks and
datacenters, or act in a coordinated manner to launch distributed denial of
service or other coordinated attacks. Cyber threats are constantly evolving,
thereby increasing the difficulty of detecting and successfully defending
against them. Cyber threats can have cascading impacts that unfold with
increasing speed across our internal networks and systems and those of our
partners and customers. Breaches of our network or data security could disrupt
the security of our internal systems and business applications, impair our
ability to provide services to our customers and protect the privacy of their
data, result in product development delays, compromise confidential or
technical business information harming our competitive position, result in
theft or misuse of our intellectual property or other assets, require us to
allocate more resources to improved technologies, or otherwise adversely affect
our business.
In
addition, our internal IT environment continues to evolve. Often we are early
adopters of new devices and technologies. We embrace new ways of sharing data
and communicating internally and with partners and customers using methods such
as social networking and other consumer-oriented technologies. Our business
policies and internal security controls may not keep pace with the speed of
these changes as new threats emerge.
Security of our product, services, devices and
customersŐ data
Security
threats are a particular challenge to companies like us whose business is
technology products and services. Threats to our own IT infrastructure can also
affect our customers. Customers using our cloud-based services rely on the
security of our infrastructure to ensure the reliability of our services and
the protection of their data. Hackers tend to focus their efforts on the most
popular operating systems, programs, and services, including many of ours, and
we expect that to continue. The security of our products and services is
important in our customersŐ purchasing decisions.
To defend against
security threats, both to our internal IT systems and those of our customers,
we must continuously engineer more secure products and services, enhance
security and reliability features, improve the deployment of software updates
to address security vulnerabilities, develop mitigation technologies that help
to secure customers from attacks even when software updates are not deployed,
maintain the digital security infrastructure that protects the integrity of our
network, products and services, and provide customers security tools such as
firewalls and anti-virus software.
The
cost of these steps could reduce our operating margins. If we fail to do these
things well, actual or perceived security vulnerabilities in our products and
services could harm our reputation and lead customers to reduce or delay future
purchases of products or subscriptions to services, or to use competing
products or services. Customers may also spend more on protecting their
existing computer systems from attack, which could delay adoption of additional
products or services. Customers may fail to update their systems, continue to
run software or operating systems we no longer support, or may fail timely to
install security patches. Any of these actions by customers could adversely
affect our revenue. Actual or perceived vulnerabilities may lead to claims
against us. Although our license agreements typically contain provisions that
eliminate or limit our exposure to liability, there is no assurance these provisions
will withstand legal challenges. Legislative or regulatory action in these
areas may increase the costs to develop, implement or secure our products and
services.
Disclosure of personal data could cause liability and harm our
reputation. As we continue to grow the number and scale of our
cloud-based offerings, we store and process increasingly large amounts of
personally identifiable information of our customers. The continued occurrence
of high-profile data breaches provides evidence of an external environment
increasingly hostile to information security. Despite our efforts to improve
the security controls across our business groups and geographies, it is
possible our security controls over personal data, our training of employees
and vendors on data security, and other practices we follow may not prevent the
improper disclosure of customer data we or our vendors store and manage.
Improper disclosure could harm our reputation, lead to legal exposure to
customers, or subject us to liability under laws that protect personal data,
resulting in increased costs or loss of revenue. Our software products and
services also enable our customers to store and process personal data
on-premises or, increasingly, in a cloud-based environment we host. Like all
providers of communications services, government authorities can sometimes
require us to produce customer data in response to valid legal orders. In the
U.S. and elsewhere, we advocate for transparency concerning these requests and
appropriate limitations on government authority to compel disclosure. Despite
our efforts to protect customer data, perceptions that the privacy of personal
information is not satisfactorily protected could inhibit sales of our products
or services, and could limit adoption of our cloud-based solutions by
consumers, businesses, and government entities. Additional security measures we
may take to address customer concerns, or constraints on our flexibility to
determine where and how to operate datacenters in response to customer
expectations or governmental rules or actions, may cause higher operating
expenses.
We may have outages, data losses, and disruptions of our online services
if we fail to maintain an adequate operations infrastructure. Our
increasing user traffic, growth in services and the complexity of our products
and services demand more computing power. We spend substantial amounts to build,
purchase or lease datacenters and equipment and to upgrade our technology and
network infrastructure to handle more traffic on our websites and in our
datacenters. These demands continue to increase as we introduce new products
and services and support the growth of existing services such as Bing, Exchange
Online, Office 365, SharePoint Online, OneDrive, Skype, Xbox Live, Microsoft
Azure, Outlook.com, Microsoft Office Web Apps, Windows Stores and Microsoft
Account services. We are rapidly growing our business of providing a platform
and back-end hosting for services provided by third-parties to their end users.
Maintaining, securing and expanding this infrastructure is expensive and
complex. Inefficiencies or operational failures, including temporary or
permanent loss of customer data, could diminish the quality of our products,
services, and user experience resulting in contractual liability, claims by
customers and other third parties, damage to our reputation and loss of current
and potential users, subscribers, and advertisers, each of which may harm our
operating results and financial condition.
Government litigation and regulatory activity relating to competition
rules may limit how we design and market our products. As
a leading global software and device maker, we are closely scrutinized by
government agencies under U.S. and foreign competition laws. An increasing number
of governments are regulating competition law activities and this includes
increased scrutiny in potentially large markets such as China. Some
jurisdictions also allow competitors or consumers to assert claims of
anti-competitive conduct. U.S. federal and state antitrust authorities have
previously brought enforcement actions and continue to scrutinize our business.
The
European Commission closely scrutinizes the design of high-volume Microsoft
products and the terms on which we make certain technologies used in these
products, such as file formats, programming interfaces, and protocols,
available to other companies. In 2004, the Commission ordered us to create new
versions of Windows that do not include certain multimedia technologies and to
provide our competitors with specifications for how to implement certain
proprietary Windows communications protocols in their own products. In 2009,
the Commission accepted a set of commitments offered by Microsoft to address
the CommissionŐs concerns relating to competition in web browsing software,
including an undertaking to address Commission concerns relating to
interoperability. These obligations may limit our ability to innovate in
Windows or other products in the future, diminish the developer appeal of the
Windows platform, and increase our product development costs. The availability
of licenses related to protocols and file formats may enable competitors to
develop software products that better mimic the functionality of our products,
which could hamper sales of our products.
Our portfolio of first-party devices
continues to grow; at the same time our OEM partners offer a large variety of
devices on our platforms. As a
result, increasingly we both cooperate and compete with our OEM partners, creating
a risk that we fail to do so in compliance with competition rules. Regulatory
scrutiny in this area may increase. Certain foreign governments, particularly
in China and other countries in Asia, have advanced arguments under their
competition laws that exert downward pressure on royalties for our intellectual
property. Because these jurisdictions only recently implemented competition
laws, their enforcement activities are unpredictable.
Government regulatory actions and court decisions
such as these may hinder our ability to provide the benefits of our software to
consumers and businesses, reducing the attractiveness of our products and the
revenue that come from them. New competition law actions could be initiated.
The outcome of such actions, or steps taken to avoid them, could adversely
affect us in a variety of ways, including:
Ą We
may have to choose between withdrawing products from certain geographies to
avoid fines or designing and developing alternative versions of those products
to comply with government rulings, which may entail a delay in a product
release and removing functionality that customers want or on which developers
rely.
Ą We
may be required to make available licenses to our proprietary technologies on
terms that do not reflect their fair market value or do not protect our
associated intellectual property.
Ą The
rulings described above may be precedent in other competition law proceedings.
Ą We
are subject to a variety of ongoing commitments because of court or
administrative orders, consent decrees or other voluntary actions we have
taken. If we fail to comply with these commitments we may incur litigation
costs and be subject to substantial fines or other remedial actions.
Our international
operations subject us to potential liability under anti-corruption, trade
protection, and other laws and regulations. The
Foreign Corrupt Practices Act and other anti-corruption laws and regulations
(ŇAnti-Corruption LawsÓ) prohibit corrupt payments by our employees, vendors,
or agents. From time to time, we receive inquiries from authorities in the U.S.
and elsewhere about our business activities outside the U.S. and our compliance
with Anti-Corruption Laws. While we devote substantial resources to our global
compliance programs and have implemented policies, training, and internal
controls designed to reduce the risk of corrupt payments, our employees,
vendors, or agents may violate our policies. Our failure to comply with
Anti-Corruption Laws could result in significant fines and penalties, criminal
sanctions against us, our officers or our employees, prohibitions on the
conduct of our business, and damage to our reputation. Operations outside the
U.S. may be affected by changes in trade protection laws, policies and
measures, and other regulatory requirements affecting trade and investment. We
may be subject to legal liability and reputational damage if we sell goods or
services in violation of U.S. trade sanctions on countries such as Iran, North
Korea, Cuba, Sudan, and Syria.
Other
regulatory areas that may apply to our products and online services offerings
include user privacy, telecommunications, data protection, and online content.
For example, regulators may take the position that our offerings such as Skype
are covered by laws regulating telecommunications services. Applying these laws
and regulations to our business is often unclear, subject to change over time,
and sometimes may conflict from jurisdiction to jurisdiction. Additionally,
these laws and governmentsŐ approach to their enforcement, and our products and
services, are continuing to evolve. Some governments are expressing increasing
concern about government surveillance practices around the world and this may
lead to increased regulation requiring local hosting obligations or the use of
domestic hosting providers. Compliance with these types of regulation may
involve significant costs or require changes in products or business practices
that result in reduced revenue. Noncompliance could result in the imposition of
penalties or orders we stop the alleged noncompliant activity.
Our business depends on our ability to attract and retain talented
employees. Our
business is based on successfully attracting and retaining talented employees.
The market for highly skilled workers and leaders in our industry is extremely
competitive. We are limited in our ability to recruit internationally by
restrictive domestic immigration laws. If we are less successful in our
recruiting efforts, or if we cannot retain key employees, including key
employees of the NDS business acquired in April 2014, our ability to
develop and deliver successful products and services may be adversely affected.
Effective succession planning is also important to our long-term success.
Failure to ensure effective transfer of knowledge and smooth transitions
involving key employees could hinder our strategic planning and execution.
We have claims and lawsuits against us that may result in adverse
outcomes. We
are subject to a variety of claims and lawsuits. Adverse outcomes in some or
all of these claims may result in significant monetary damages or injunctive
relief that could adversely affect our ability to conduct our business. The
litigation and other claims are subject to inherent uncertainties and managementŐs
view of these matters may change in the future. A material adverse impact on
our consolidated financial statements could occur for the period in which the
effect of an unfavorable final outcome becomes probable and reasonably
estimable.
We may have additional tax liabilities. We
are subject to income taxes in the U.S. and many foreign jurisdictions.
Significant judgment is required in determining our worldwide provision for
income taxes. In the ordinary course of our business, there are many transactions
and calculations where the ultimate tax determination is uncertain. We
regularly are under audit by tax authorities. Economic and
political pressures to increase tax revenues in various jurisdictions may
make resolving tax disputes more difficult. Although we believe our tax
estimates are reasonable, the final determination of tax audits and any related
litigation could be materially different from our historical income tax
provisions and accruals. The results of an audit or litigation could have a
material effect on our consolidated financial statements in the period or
periods for which that determination is made.
We
earn a significant amount of our operating income from outside the U.S., and
any repatriation of funds currently held in foreign jurisdictions to the U.S.
may result in higher effective tax rates for the company. In addition, there
have been proposals from Congress to change U.S. tax laws that would
significantly impact how U.S. multinational corporations are taxed on foreign
earnings. Although we cannot predict whether or in what form any proposed
legislation may pass, if enacted it could have a material adverse impact on our
tax expense and cash flows.
Our hardware and software products may experience
quality or supply problems. Our vertically-integrated hardware products such
as Xbox consoles, Surface devices, Lumia Smartphones, and other devices we
design and market are highly complex and can have defects in design,
manufacture, or associated software. We could incur significant expenses, lost
revenue, and reputational harm if we fail to detect or address such issues
through design, testing, or warranty repairs. We get some device components
from sole suppliers. Our competitors use some of the same suppliers and their
demand for hardware components can affect the capacity available to us. If a
component from a sole-source supplier is delayed or becomes unavailable,
whether because of supplier capacity constraint or industry shortages, we may not
obtain timely replacement supplies, resulting in reduced sales. Component
shortages, excess or obsolete inventory, or price reductions resulting in
inventory adjustments may increase our cost of revenue. Xbox consoles and Surface
devices and Lumia phones are assembled in Asia and other geographies that may
be subject to disruptions in the supply chain, resulting in shortages that
would affect our revenue and operating margins. These same risks would apply to
any other vertically-integrated hardware and software products we may offer.
Our
software products also may experience quality or reliability problems. The
highly sophisticated software products we develop may contain bugs and other
defects that interfere with their intended operation. Any defects we do not
detect and fix in pre-release testing could cause reduced sales and revenue,
damage to our reputation, repair or remediation costs, delays in the release of
new products or versions, or legal liability. Although our license agreements
typically contain provisions that eliminate or limit our exposure to liability,
there is no assurance these provisions will withstand legal challenge.
Our global business exposes us to operational and economic risks. We
operate in over 100 countries and a significant part of our revenue comes from
international sales. The global nature of our business creates operational and
economic risks. Emerging markets are a significant focus of our international
growth strategy. The developing nature of these markets presents several risks,
including deterioration of social, political, labor, or economic conditions in
a country or region, and difficulties in staffing and managing foreign
operations. Although we hedge a portion of our international currency exposure,
significant fluctuations in exchange rates between the U.S. dollar and foreign
currencies
may adversely affect our revenue. Competitive or regulatory pressure to make
our pricing structure uniform might require that we reduce the sales price of
our software in the U.S. and other countries.
Catastrophic events or geo-political conditions may disrupt our
business. A
disruption or failure of our systems or operations because of a major
earthquake, weather event, cyber-attack, terrorist attack, or other
catastrophic event could cause delays in completing sales, providing services,
or performing other critical functions. Our corporate headquarters, a
significant portion of our research and development activities, and certain
other essential business operations are in the Seattle, Washington area, and we
have other business operations in the Silicon Valley area of California, both
of which are near major earthquake faults. A catastrophic event that results in
the destruction or disruption of any of our critical business or IT systems
could harm our ability to conduct normal business operations. Providing our
customers with more services and solutions in the cloud puts a premium on the
resilience of our systems and strength of our business continuity management
plans, and magnifies the potential impact of prolonged service outages on our
operating results.
Abrupt political change, terrorist activity, and
armed conflict pose a risk of general economic disruption in affected
countries, which may increase our operating costs. These conditions also may
add uncertainty to the timing and budget for technology investment decisions by
our customers, and may cause supply chain disruptions for hardware
manufacturers, either of which may adversely affect our revenue. The long-term
effects of climate change on the global economy or the IT industry in
particular are unclear. Environmental regulations or changes in the supply,
demand or available sources of energy may affect the availability or cost of
goods and services, including natural resources, necessary to run our business.
Changes in weather where we operate may increase the costs of powering and
cooling computer hardware we use to develop software and provide cloud-based
services.
Adverse
economic or market conditions may harm our business. Worsening economic conditions,
including inflation, recession, or other changes in economic conditions, may cause
lower IT spending and adversely affect our revenue. If demand for PCs, servers,
and other computing devices declines, or consumer or business spending for
those products declines, our revenue will be adversely affected. Substantial
revenue comes from our U.S. government contracts. An extended federal
government shutdown resulting from failing to pass budget appropriations, adopt
continuing funding resolutions or raise the debt ceiling, and other budgetary
decisions limiting or delaying federal government spending, could reduce
government IT spending on our products and services and adversely affect our
revenues. Our product distribution system also relies on an extensive partner
and retail network. OEMs building devices that run our software have also been a
significant means of distribution. The impact of economic conditions on our
partners, such as the bankruptcy of a major distributor, OEM, or retailer,
could cause sales channel disruption. Challenging economic conditions also may
impair the ability of our customers to pay for products and services they have
purchased. As a result, allowances for doubtful accounts and write-offs of
accounts receivable may increase. We maintain an investment portfolio of
various holdings, types, and maturities. These investments are subject to
general credit, liquidity, market, and interest rate risks, which may be
exacerbated by unusual events that affect global financial markets. A
significant part of our investment portfolio comprises U.S. government
securities. If global credit and equity
markets
decline for long periods, or if there is a downgrade of the U.S. government
credit rating due to an actual or threatened default on government debt, our
investment portfolio may be adversely affected and we could determine that more
of our investments have experienced an other-than-temporary decline in fair
value, requiring impairment charges that could adversely affect our financial
results.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We have
received no written comments regarding our periodic or current reports from the
staff of the SEC that were issued 180 days or more preceding the end of our
fiscal year 2014 that remain unresolved.
ITEM 2. PROPERTIES
Our
corporate offices consist of approximately 15 million square feet of
office space located in King County, Washington: 10 million square feet of
owned space situated on approximately 500 acres of land we own at our corporate
campus in Redmond, Washington and approximately five million square feet of
space we lease. We own approximately three million additional square feet
of office and data center space domestically (outside of the Puget Sound
corporate campus) and lease many sites domestically totaling approximately five million
square feet of office and data center space.
We
occupy many sites internationally, totaling approximately five million square
feet that is owned and approximately twelve million square feet that is
leased. International facilities that we own include: our development center in
Hyderabad, India; our European operations center in Dublin, Ireland; a research
and development campus in Beijing, China; and our facilities in Salo, Finland
and Reading, UK. The largest leased office spaces include the following locations:
Beijing and Shanghai, China; Tokyo, Japan; Unterschleissheim, Germany; Paris,
France; Dublin, Ireland; Espoo, Tampere, and Oulu, Finland, Bangalore, India;
Reading, UK; Vedbaek, Denmark; and Mississauga, Canada. In addition to the
above locations, we have a disk duplication and digital distribution facility
in Humacao, Puerto Rico, a facility in Singapore for our Asia Pacific
operations center and regional headquarters, and various product development
facilities, both domestically and internationally, as described in the
ŇResearch and DevelopmentÓ section of Item 1 of this Form 10-K.
Our
facilities are fully used for current operations of all segments, and suitable
additional spaces are available to accommodate expansion needs. We have a
development agreement with the City of Redmond under which we may currently
develop approximately 1.6 million square feet of additional facilities at
our corporate campus in Redmond, Washington.
We
operate manufacturing facilities in Brazil, China, Hungary, Mexico, and Vietnam
for the production of phones.
ITEM 3. LEGAL PROCEEDINGS
See
Note 17 Đ Contingencies of the Notes to Financial Statements (Part II,
Item 8 of this Form 10-K) for information regarding legal proceedings in
which we are involved.
ITEM 4. MINE SAFETY DISCLOSURES
Not
applicable.
PART II
ITEM 5. MARKET FOR REGISTRANTŐS COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET AND STOCKHOLDERS
Our common stock is traded on the NASDAQ Stock
Market under the symbol MSFT. On July 22, 2014, there were 113,923
registered holders of record of our common stock. The high and low common stock
sales prices per share were as follows:
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Quarter Ended |
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September 30 |
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December 31 |
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March 31 |
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June 30 |
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Fiscal Year |
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Fiscal Year 2014 |
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High |
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$ 36.43 |
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$ 38.98 |
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$ 41.50 |
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$ 42.29 |
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$ 42.29 |
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Low |
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$ 30.84 |
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$ 32.80 |
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$ 34.63 |
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$ 38.51 |
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$ 30.84 |
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Fiscal Year 2013 |
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High |
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$ 31.61 |
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$ 30.25 |
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$ 28.66 |
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$ 35.78 |
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$ 35.78 |
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Low |
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$ 28.54 |
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$ 26.26 |
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$ 26.28 |
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$ 28.11 |
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$ 26.26 |
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DIVIDENDS AND SHARE REPURCHASES
See Note 18 Đ StockholdersŐ Equity of the Notes to
Financial Statements (Part II, Item 8 of this Form 10-K) for information
regarding dividends and share repurchases by quarter. Following are our monthly
stock repurchases for the fourth quarter of fiscal year 2014, all of which were
made as part of publicly announced plans or programs:
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Period |
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Total Number of Shares Purchased |
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Average Price Paid per Share |
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Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
|
Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs |
|
||||
|
|
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
||||
|
|
|
|
|
|
||||||||||||
|
April 1, 2014 Đ
April 30, 2014 |
|
|
756,720 |
|
|
$ |
41.37 |
|
|
|
756,720 |
|
|
|
$ 36,177 |
|
|
May 1, 2014 Đ
May 31, 2014 |
|
|
27,395,976 |
|
|
$ |
39.63 |
|
|
|
27,395,976 |
|
|
|
$ 35,092 |
|
|
June 1, 2014 Đ June 30, 2014 |
|
|
0 |
|
|
$ |
0.00 |
|
|
|
0 |
|
|
|
$ 35,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
28,152,696 |
|
|
|
|
|
|
|
28,152,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
repurchases were made using cash resources and occurred in the open market.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
|
Year Ended June 30, |
|
|
2014 |
(a) |
|
|
2013 |
|
|
|
2012 |
|
|
|
2011 |
|
|
|
2010 |
|
|
|
|
|
|
|
|
|||||||||||||||
|
Revenue |
|
$ |
86,833 |
|
|
$ |
77,849 |
|
|
$ |
73,723 |
|
|
$ |
69,943 |
|
|
$ |
62,484 |
|
|
Operating income |
|
$ |
27,759 |
|
|
$ |
26,764 |
(c) |
|
$ |
21,763 |
(d) |
|
$ |
27,161 |
|
|
$ |
24,098 |
|
|
Net income |
|
$ |
22,074 |
(b) |
|
$ |
21,863 |
(c) |
|
$ |
16,978 |
(d) |
|
$ |
23,150 |
|
|
$ |
18,760 |
|
|
Diluted earnings per share |
|
$ |
2.63 |
(b) |
|
$ |
2.58 |
(c) |
|
$ |
2.00 |
(d) |
|
$ |
2.69 |
|
|
$ |
2.10 |
|
|
Cash dividends declared per share |
|
$ |
1.12 |
|
|
$ |
0.92 |
|
|
$ |
0.80 |
|
|
$ |
0.64 |
|
|
$ |
0.52 |
|
|
Cash, cash equivalents,
and short-term investments |
|
$ |
85,709 |
|
|
$ |
77,022 |
|
|
$ |
63,040 |
|
|
$ |
52,772 |
|
|
$ |
36,788 |
|
|
Total assets |
|
$ |
172,384 |
|
|
$ |
142,431 |
|
|
$ |
121,271 |
|
|
$ |
108,704 |
|
|
$ |
86,113 |
|
|
Long-term obligations |
|
$ |
36,975 |
|
|
$ |
26,070 |
|
|
$ |
22,220 |
|
|
$ |
22,847 |
|
|
$ |
13,791 |
|
|
StockholdersŐ equity |
|
$ |
89,784 |
|
|
$ |
78,944 |
|
|
$ |
66,363 |
|
|
$ |
57,083 |
|
|
$ |
46,175 |
|
|
|
|
|||||||||||||||||||
(a) On April 25, 2014, we acquired substantially
all of NokiaŐs Devices and Services business (ŇNDSÓ). NDS has been included in our consolidated results of operations
starting on the acquisition date.
(b) Includes a tax provision adjustment recorded
in the fourth quarter of fiscal year 2014 related to adjustments to prior
yearsŐ liabilities for intercompany transfer pricing which decreased net income
by $458 million and diluted earnings per share by $0.05.
(c) Includes
a charge related to a fine imposed by the European Commission in March 2013
which decreased operating income and net income by $733 million (Ű561 million)
and diluted earnings per share by $0.09. Also includes a charge for Surface RT
inventory adjustments recorded in the fourth quarter of fiscal year 2013, which
decreased operating income by $900 million, net income by $596 million, and
diluted earnings per share by $0.07.
(d) Includes
a goodwill impairment charge related to our previous Online Services Division
business segment (related to Devices and Consumer Other under our current
segment structure) which decreased operating income and net income by $6.2
billion and diluted earnings per share by $0.73.
ITEM 7. MANAGEMENTŐS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following ManagementŐs Discussion and Analysis (ŇMD&AÓ) is intended to help
the reader understand the results of operations and financial condition of
Microsoft Corporation. MD&A is provided as a supplement to, and should be
read in conjunction with, our consolidated financial statements and the
accompanying Notes to Financial Statements.
OVERVIEW
Microsoft is a
technology leader focused on being the productivity
and platform company for the mobile-first and cloud-first world. We strive to reinvent
productivity to empower people and organizations to do more and achieve more.
We create technology that transforms the way people work, play, and communicate
across a wide range of computing devices.
We generate
revenue by developing, licensing, and supporting a wide range of software
products, by offering an array of services, including cloud-based services to
consumers and businesses, by designing, manufacturing, and selling devices that
integrate with our cloud-based services, and by delivering relevant online
advertising to a global audience. Our most significant expenses are related to
compensating employees, designing, manufacturing, marketing, and selling our
products and services, datacenter costs in support of our cloud-based services,
and income taxes.
Industry Trends
Our industry is
dynamic and highly competitive, with frequent changes in both technologies and
business models. Each industry shift is an opportunity to conceive new
products, new technologies, or new ideas that can further transform the
industry and our business. At Microsoft, we push the boundaries of what is
possible through a broad range of research and development activities that seek
to identify and address the changing demands of customers, industry trends, and
competitive forces.
Key
Opportunities and Investments
We see significant
opportunities for growth by investing research and development resources in the
following areas:
Ą Digital
work and life experiences
Ą Our
cloud operating system
Ą Our
devices operating system and hardware
With investments
in these areas, we work to fulfill the evolving needs of our customers in a
mobile-first and cloud-first world. We view mobility broadly Đ not just by
devices, but by experiences. Today, people move just as quickly into new
contexts as to new locations. Mobility goes beyond devices users carry with
them as they move from place to place, to encompass the rich collection of
data, applications, and services that accompany them as they move from setting
to setting in their lives. Many of our customers are Ňdual users,Ó employing
technology for work or school and also deeply in their personal lives.
Digital work
and life experiences
We believe we can
significantly enhance the digital lives of our customers using our broad
portfolio of communication, productivity, and information services. We work to
deliver digital work and life experiences that are reinvented for the
mobile-first and cloud-first world. Productivity will be the first and foremost
objective, to enable people to meet and collaborate more easily, and to
effectively express ideas in new ways. We will design applications as dual use
with the intelligence to partition data between work and life while respecting
each personŐs privacy choices. The foundation for these efforts will rest on
advancing our leading productivity, collaboration, and business process tools
including Skype, OneDrive, OneNote, Outlook, Word, Excel, PowerPoint, Bing, and
Dynamics.
We see opportunity
in combining these services in new ways that are more contextual and personal, while
ensuring people, rather than their devices, remain at the center of the digital
experience. We will offer our services across ecosystems and devices outside
our own. As people move from device to device, so will their content and the
richness of their services. We will engineer applications so users can find,
try, and buy them in friction-free ways.
Cloud operating
system
Today, businesses
face important opportunities and challenges. Enterprises are asked to deploy
technology that advances business strategy. They decide what solutions will
make employees more productive, collaborative, and satisfied, or connect with
customers in new and compelling ways. They work to unlock business insights
from a world of data. They rely on our technology to manage employee corporate
identity, and to manage and secure corporate information accessed and stored
across a growing number of devices. To achieve these objectives, increasingly
businesses look to leverage the benefits of the cloud. Helping businesses move
to the cloud is one of our largest opportunities, and we believe we work from a
position of strength.
The shift to the
cloud is driven by three important economies of scale: larger datacenters can
deploy computational resources at significantly lower cost per unit than
smaller ones; larger datacenters can coordinate and aggregate diverse customer,
geographic, and application demand patterns improving the utilization of
computing, storage, and network resources; and multi-tenancy lowers application
maintenance labor costs for large public clouds. The cloud creates the
opportunity for businesses to focus on innovation while leaving
non-differentiating activities to reliable and cost-effective providers.
With Azure, we are
one of very few cloud vendors that run at a scale that meets the needs of
businesses of all sizes and complexities. We believe the combination of Azure
and Windows Server makes us the only company with a public, private, and hybrid
cloud platform that can power modern business. We are working to enhance the
return on IT investment by enabling enterprises to combine their existing
datacenters and our public cloud into a single cohesive infrastructure.
Businesses can deploy applications in their own datacenter, a partnerŐs
datacenter, or in our datacenters with common security, management, and
administration across all environments, with the flexibility and scale they
desire.
Our cloud will
also enable richer employee experiences. We enable organizations to securely
adopt software-as-a-service applications (both our own and third-party) and
integrate them with their existing security and management infrastructure. We
will continue to innovate with higher level services including identity and
directory services, rich data storage and analytics services, machine learning
services, media services, web, and mobile backend services, and developer
productivity services. To foster a rich developer ecosystem, our digital work
and life experiences will also be extensible, enabling customers and partners
to further customize and enhance our solutions, achieving even more value. Our
strategy requires continuing investment in datacenters and other infrastructure
to support our devices and services, and will bring continued competition with
Google, Amazon, and other well-established and emerging competitors.
Device operating
system and hardware
With our Windows
device operating system and first-party hardware, we strive to set the standard
for productivity experiences. We aim to deliver the richest and most consistent
user experience for digital work and life scenarios on screens of all sizes Ń
from phones, tablets, and laptops to TVs and large, multi-touch displays. We
are investing to make Windows the most secure, manageable, and capable
operating system for the needs of a modern workforce. We are working to create
a broad developer opportunity by enabling universal Windows applications to run
across all device targets. We are developing new input/output methods like
speech, pen, and gesture to power more personal computing experiences.
We
work with an ecosystem of partners to deliver a broad spectrum of Windows
devices. We also build first-party hardware to set the standard for
productivity experiences and stimulate more demand for the entire Windows
ecosystem, as we do with Surface, and with the acquisition of substantially all
Nokia CorporationŐs (ŇNokiaÓ) Devices and Services business (ŇNDSÓ) on
April 25, 2014, phones. As consumer services and hardware advance, we
expect they will continue to better complement one another, connecting the
devices people use daily to unique communications, productivity, and
entertainment services from Microsoft and our partners and developers. We
anticipate many new mobile device categories and we anticipate experiences to
emerge that span a variety of devices of all screen sizes. We will invest to be
on the forefront of this innovation focusing on dual users and their needs
across work and life. With the acquisition of NDS, we expect our effective tax
rate to increase as our business mix changes.
Our future opportunity
There are several distinct areas of technology that
we aim to drive forward. Our goal is to lead the industry in these areas over
the long term, which we expect will translate to sustained growth. We are
investing significant resources in:
Ą Delivering
new high-value digital work and digital life experiences to improve how people
learn, work, play, and interact with one another.
Ą Establishing
our Windows platform across the PC, tablet, phone, server, other devices, and the
cloud to drive a thriving ecosystem of developers, unify the cross-device user
experience, and increase agility when bringing new advances to market.
Ą Building
and running cloud-based services in ways that unleash new experiences and
opportunities for businesses and individuals.
Ą Developing
new devices that have increasingly natural ways to use them, including touch,
gesture, and speech.
Ą Applying
machine learning to make technology more intuitive and able to act on our
behalf, instead of at our command.
We
believe the breadth of our products and services portfolio, our large, global
partner and customer base, our growing ecosystem, and our ongoing investment in
innovation position us to be a leader in these areas.
Economic Conditions, Challenges, and Risks
The
market for software, devices, and cloud-based services is dynamic and highly
competitive. Our competitors are developing new software and devices, while
also deploying competing cloud-based services for consumers and businesses. The
devices and form factors customers prefer evolve rapidly, and influence how
users access services in the cloud and in some cases the userŐs choice of which
suite of cloud-based services to use. We must continue to evolve and adapt over
an extended time in pace with this changing environment. To support our
strategy of reinventing productivity to empower every person and every
organization to do more and achieve more, we announced a restructuring plan in
July 2014. Through this restructuring, we strive to increase agility, streamline
engineering processes, move faster and more efficiently, and simplify our
organization. Even if we achieve these goals, the investments we are making in
devices and infrastructure will increase our operating costs and may decrease
our operating margins.
We
prioritize our investments among the highest long-term growth opportunities.
These investments require significant resources and are multi-year in nature.
The products and services we bring to market may be developed internally, as
part of a partnership or alliance, or through acquisition.
Our
success is highly dependent on our ability to attract and retain qualified
employees. We hire a mix of university and industry talent worldwide. Microsoft
competes for talented individuals globally by offering an exceptional working
environment, broad customer reach, scale in resources, the ability to grow
oneŐs career across many different products and businesses, and competitive
compensation and benefits. Aggregate demand for our software, services, and
devices is correlated to global macroeconomic and geopolitical factors, which
remain dynamic. See a discussion of these factors and other risks under Risk
Factors (Part I, Item 1A of this Form 10-K).
Unearned Revenue
Quarterly and annual revenue may be impacted by the
deferral of revenue. See the discussions below regarding:
Ą revenue
deferred on certain devices bundled with other products and services (ŇBundled
OfferingsÓ); and
Ą revenue
deferred on sales of Windows 7 with an option to upgrade to Windows 8 Pro at a
discounted price (the ŇWindows Upgrade OfferÓ).
If
our customers choose to license cloud-based versions of our products and
services rather than licensing transaction-based products and services, the
associated revenue will shift from being recognized at the time of the
transaction to being recognized over the subscription period or upon
consumption, as applicable.
Reportable Segments
The
segment amounts included in MD&A are presented on a basis consistent with
our internal management reporting. Segment information appearing in Note 21 Đ
Segment Information and Geographic Data of the Notes to Financial Statements
(Part II, Item 8 of this Form 10-K) is also presented on this basis. All
differences between our internal management reporting basis and accounting
principles generally accepted in the U.S. (ŇU.S. GAAPÓ), along with certain
corporate-level and other activity, are included in Corporate and other.
Operating expenses are not allocated to our segments.
During
the first quarter of fiscal year 2014, we changed our organizational structure
as part of our transformation to a devices and services company. As a result,
information that our chief operating decision maker regularly reviews for
purposes of allocating resources and assessing performance changed. Therefore,
we have recast certain prior period amounts to conform to the way we internally
managed and monitored segment performance during fiscal year 2014. Our
reportable segments are described below.
On April 25, 2014, we acquired substantially all of NDS for total
consideration of $9.5 billion. This amount was greater than the $7.2 billion
disclosed previously, primarily due to $1.5 billion of cash acquired, foreign
currency movements of $330 million, working capital adjustments of $210
million, and other adjustments of $260 million. See Note 9 Đ Business
Combinations of the Notes to Financial Statements for additional details. NDS
has been included in our consolidated results of operations starting on the
acquisition date. We report the financial performance of the acquired business in
our new Phone Hardware segment. Prior to the acquisition of NDS, financial
results associated with our joint strategic initiatives with Nokia were
reflected in our D&C Licensing segment. The contractual relationship with
Nokia related to those initiatives terminated in conjunction with the
acquisition. With the creation of the new Phone Hardware segment, the D&C
Hardware segment was renamed Computing and Gaming Hardware in the fourth
quarter of fiscal year 2014.
Devices and Consumer (ŇD&CÓ)
Our D&C segments develop, manufacture, market,
and support products and services designed to entertain and connect people,
increase personal productivity, help people simplify tasks and make more
informed decisions online, and help advertisers connect with audiences. Our
D&C segments are:
Ą D&C
Licensing, comprising: Windows, including all OEM licensing (ŇWindows OEMÓ)
and other non-volume licensing and academic volume licensing of the Windows
operating system and related software; non-volume licensing of Microsoft
Office, comprising the core Office product set, for consumers (ŇOffice
ConsumerÓ); Windows Phone operating system, including related patent licensing;
and certain other patent licensing revenue;
Ą Computing and Gaming Hardware,
comprising: Xbox gaming and entertainment consoles and accessories,
second-party and third-party video game royalties, and Xbox Live subscriptions
(ŇXbox PlatformÓ); Surface devices and accessories; and Microsoft PC
accessories;
Ą Phone
Hardware, comprising: Lumia Smartphones and other non-Lumia phones, beginning
with our acquisition of NDS; and
Ą D&C
Other, comprising: Resale, including Windows Store, Xbox Live transactions,
and Windows Phone Store; search advertising; display advertising; Office 365
Consumer, comprising Office 365 Home and Office 365 Personal; Studios,
comprising first-party video games; our retail stores; and certain other
consumer products and services not included in the categories above.
Commercial
Our Commercial segments develop, market, and
support software and services designed to increase individual, team, and
organizational productivity and efficiency, including simplifying everyday
tasks through seamless operations across the userŐs hardware and software. Our
Commercial segments are:
Ą Commercial
Licensing, comprising: server products, including Windows Server, Microsoft
SQL Server, Visual Studio, System Center, and related Client Access Licenses
(ŇCALsÓ); Windows Embedded; volume licensing of the Windows operating system,
excluding academic (ŇWindows CommercialÓ); Microsoft Office for business,
including Office, Exchange, SharePoint, Lync, and related CALs (ŇOffice
CommercialÓ); Microsoft Dynamics business solutions, excluding Dynamics CRM Online;
and Skype; and
Ą Commercial
Other, comprising: Enterprise Services, including Premier Support Services
and Microsoft Consulting Services; Commercial Cloud, comprising Office 365
Commercial, other Microsoft Office online offerings, Dynamics CRM Online, and
Microsoft Azure; and certain other commercial products and online services not
included in the categories above.
SUMMARY RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages and per share amounts) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
Percentage |
|
|
Percentage |
|
|||||
|
|
|
|||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
|
Revenue |
|
$ |
86,833 |
|
|
$ |
77,849 |
|
|
$ |
73,723 |
|
|
|
12% |
|
|
|
6% |
|
|
Gross margin |
|
$ |
59,899 |
|
|
$ |
57,600 |
|
|
$ |
56,193 |
|
|
|
4% |
|
|
|
3% |
|
|
Operating income |
|
$ |
27,759 |
|
|
$ |
26,764 |
|
|
$ |
21,763 |
|
|
|
4% |
|
|
|
23% |
|
|
Diluted earnings per share |
|
$ |
2.63 |
|
|
$ |
2.58 |
|
|
$ |
2.00 |
|
|
|
2% |
|
|
|
29% |
|
|
|
|
|||||||||||||||||||
Fiscal year 2014 compared with fiscal year
2013
Revenue
increased $9.0 billion or 12%, demonstrating growth across our consumer and
commercial businesses, primarily due to higher revenue from server products,
Xbox Platform, Commercial Cloud, and Surface. Revenue also increased due to the
acquisition of NDS. Commercial Cloud revenue doubled, reflecting continued subscriber
growth from our cloud-based offerings.
Gross
margin increased $2.3 billion or 4%, primarily due to higher revenue, offset in
part by a $6.7 billion or 33% increase in cost of revenue. Cost of revenue
increased mainly due to higher volumes of Xbox consoles and Surface devices
sold, and $575 million higher datacenter expenses, primarily in support of
Commercial Cloud revenue growth. Cost of revenue also increased due to the
acquisition of NDS.
Operating income increased $995 million or 4%,
reflecting higher gross margin, offset in part by increased research and
development expenses and sales and marketing expenses. Key changes in operating
expenses were:
Ą Research
and development expenses increased $970 million or 9%, due mainly to increased
investment in new products and services in our Devices engineering group,
including NDS expenses, and increased investment in our Applications and
Services engineering group.
Ą Sales
and marketing expenses increased $535 million or 4%, primarily due to NDS
expenses and increased investment in sales resources, offset in part by lower
advertising costs.
Fiscal year 2013 compared with fiscal year
2012
Revenue
increased $4.1 billion or 6%, mainly due to growth in revenue from our
Commercial segments. Revenue was also impacted by the timing of revenue
deferrals.
Operating income grew $5.0 billion or 23%,
primarily due to the $6.2 billion goodwill impairment charge recorded during
the prior year. Other key changes in cost of revenue and operating expenses
were:
Ą Cost
of revenue increased $2.7 billion or 16%, reflecting increased product costs
associated with Surface and Windows 8, including an approximately $900 million
charge for Surface RT inventory adjustments, higher headcount-related expenses,
payments made to Nokia related to joint strategic initiatives, royalties on
Xbox Live content, and retail stores expenses, offset in part by decreased
costs associated with lower sales of Xbox 360 consoles and decreased traffic
acquisition costs.
Ą Sales
and marketing expenses increased $1.4 billion or 10%, reflecting advertising of
Windows 8 and Surface.
Ą Research
and development expenses increased $600 million or 6%, due mainly to higher
headcount-related expenses, largely related to the Xbox Platform.
Ą General
and administrative expenses increased $580 million or 13%, due to higher legal
charges, primarily due to the European Commission fine of Ű561 million (approximately $733 million) for failure to comply with
our 2009 agreement to display a ŇBrowser Choice ScreenÓ on Windows PCs where
Internet Explorer is the default browser (the ŇEU fineÓ).
SEGMENT RESULTS OF OPERATIONS
Devices and Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions, except percentages) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
Percentage |
|
|
Percentage |
|
|||||
|
|
|
|||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|||||||||||||||
|
Licensing |
|
$ |
18,803 |
|
|
$ |
19,021 |
|
|
$ |
19,495 |
|
|
|
(1)% |
|
|
|
(2)% |
|
|
Hardware: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Computing and Gaming Hardware |
|
|
9,628 |
|
|
|
6,461 |
|
|
|
6,740 |
|
|
|
49% |
|
|
|
(4)% |
|
|
Phone Hardware |
|
|
1,985 |
|
|
|
0 |
|
|
|
0 |
|
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total D&C Hardware |
|
|
11,613 |
|
|
|
6,461 |
|
|
|
6,740 |
|
|
|
80% |
|
|
|
(4)% |
|
|
Other |
|
|
7,258 |
|
|
|
6,618 |
|
|
|
6,203 |
|
|
|
10% |
|
|
|
7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total D&C revenue |
|
$ |
37,674 |
|
|
$ |
32,100 |
|
|
$ |
32,438 |
|
|
|
17% |
|
|
|
(1)% |
|
|
|
|
|
|
|
||||||||||||||||
|
Gross Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|||||||||||||||
|
Licensing |
|
$ |
17,216 |
|
|
$ |
17,044 |
|
|
$ |
17,240 |
|
|
|
1% |
|
|
|
(1)% |
|
|
Hardware: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Computing and Gaming Hardware |
|
|
893 |
|
|
|
956 |
|
|
|
2,495 |
|
|
|
(7)% |
|
|
|
(62)% |
|
|
Phone Hardware |
|
|
54 |
|
|
|
0 |
|
|
|
0 |
|
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total D&C Hardware |
|
|
947 |
|
|
|
956 |
|
|
|
2,495 |
|
|
|
(1)% |
|
|
|
(62)% |
|
|
Other |
|
|
1,770 |
|
|
|
2,046 |
|
|
|
1,998 |
|
|
|
(13)% |
|
|
|
2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total D&C gross margin |
|
$ |
19,933 |
|
|
$ |
20,046 |
|
|
$ |
21,733 |
|
|
|
(1)% |
|
|
|
(8)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Not
meaningful
Fiscal year 2014 compared with fiscal year 2013
D&C
revenue increased $5.6 billion or 17%, primarily due to higher revenue from Xbox
Platform, Surface, and Windows Phone. Revenue also increased $2.0 billion due
to the acquisition of NDS. D&C gross margin decreased slightly, reflecting
higher cost of revenue, offset in part by higher revenue. Cost of revenue
increased $5.7 billion or 47%, due mainly to Xbox Platform and Surface. Cost of
revenue also increased $1.9 billion due to NDS.
D&C Licensing
D&C
Licensing revenue decreased $218 million or 1%, due mainly to lower revenue
from licenses of Windows and Office Consumer, as well as a decrease in royalty
revenue, offset in part by increased Windows Phone revenue. Retail and non-OEM
sales of Windows declined $304 million or 41%, due mainly to the launch of
Windows 8 in the prior year. Windows OEM revenue declined $136 million or 1%,
due to continued softness in the consumer PC market, offset in part by a 12%
increase in OEM Pro revenue. Office Consumer revenue declined $243 million or 8%,
reflecting the transition of customers to Office 365 Consumer as well as
continued softness in the consumer PC market. The declines in Windows OEM and
Office Consumer revenue were partially offset by benefits realized from ending
our support for Windows XP in April 2014. Windows Phone revenue increased $822
million or 48%, due mainly to the recognition of $382 million revenue under our
joint strategic initiatives with Nokia, which concluded in conjunction with the
acquisition of NDS, as well as an increase in phone patent licensing revenue.
D&C
Licensing gross margin increased $172 million or 1%, primarily due to a $390 million
or 20% decrease in cost of revenue. D&C Licensing cost of revenue
decreased, due mainly to a $411 million or 23% decline in traffic acquisition
costs.
Computing and Gaming Hardware
Computing
and Gaming Hardware revenue increased $3.2 billion or 49%, primarily due to
higher revenue from the Xbox Platform and Surface. Xbox Platform revenue
increased $1.7 billion or 34%, due mainly to sales of Xbox One, which was
released in November 2013, offset in part by a decrease in sales of Xbox 360.
We sold 11.7 million Xbox consoles during fiscal year 2014 compared with 9.8 million
Xbox consoles during fiscal year 2013. Surface revenue increased $1.3 billion
or 157%, due mainly to a higher number of devices and accessories sold.
Computing
and Gaming Hardware gross margin decreased slightly, due to a $3.2 billion or 59%
increase in cost of revenue, offset in part by higher revenue. Xbox Platform
cost of revenue increased $2.1 billion or 72%, due mainly to higher volumes of
consoles sold and higher costs associated with Xbox One. Surface cost of
revenue increased $970 million or 51%, due mainly to a higher number of devices
and accessories sold, offset in part by a charge for Surface RT inventory
adjustments of approximately $900 million in fiscal year 2013.
Phone Hardware
Phone
Hardware revenue was $2.0 billion, reflecting sales of Lumia Smartphones and other
non-Lumia phones following the acquisition of NDS on April 25, 2014. Since
the acquisition, we sold 5.8 million Lumia Smartphones and 30.3 million
non-Lumia phones.
Phone
Hardware gross margin was $54 million, reflecting revenue of $2.0 billion,
offset in part by $1.9 billion cost of revenue, including amortization of
acquired intangible assets and the impact of decisions to rationalize our
device portfolio.
D&C Other
D&C
Other revenue increased $640 million or 10%, due mainly to higher online
advertising revenue and Office 365 Consumer revenue, offset in part by a $213 million
decrease in first-party video games revenue, primarily due to the release of
Halo 4 in the second quarter of fiscal year 2013. Online advertising
revenue increased $497 million or 14%. Search advertising revenue
increased 39%, due primarily to increased revenue per search resulting from
ongoing improvements in advertising products, higher search volume, and the
expiration of North American revenue per search guarantee payments to Yahoo! in the prior year, offset in part by a 25%
reduction in display advertising revenue. Office 365 Consumer revenue grew $316
million, primarily reflecting subscriber growth. We ended fiscal year 2014 with
over five million subscribers.
D&C
Other gross margin decreased $276 million or 13%, due to a $916 million or 20%
increase in cost of revenue, offset in part by higher revenue. D&C Other
cost of revenue grew, due mainly to a $541 million or 24% increase in online
advertising cost of revenue, reflecting support of online infrastructure. Cost
of revenue also increased $219 million or 15%, due to higher resale
transactions costs.
Fiscal year 2013 compared with fiscal year
2012
D&C revenue decreased $338 million or 1%,
reflecting lower revenue from D&C Licensing and Computing and Gaming
Hardware, offset in part by increased revenue from D&C Other. D&C gross
margin decreased $1.7 billion or 8%, primarily due to higher cost of revenue
and lower revenue. Cost of revenue increased $1.3 billion or 13%, primarily due
to Computing and Gaming Hardware.
D&C Licensing
D&C
Licensing revenue decreased $474 million or 2%, due mainly to lower revenue
from licenses of Consumer and Windows OEM, offset in part by increased Windows
Phone revenue. Office Consumer revenue declined $618 million or 15%, while
Windows OEM revenue declined 10%. These decreases resulted primarily from the
impact on revenue of a decline in the x86 PC market, which we estimate declined
approximately 9%. Windows Phone revenue increased $1.2 billion, including an
increase in patent licensing revenue and sales of Windows Phone licenses.
In
May 2013, we announced that we had surpassed 100 million licenses sold for
Windows 8.
D&C
Licensing gross margin decreased $196 million or 1%, due to decreased revenue,
offset in part by a $278 million or 12% decrease in cost of revenue. D&C
Licensing cost of revenue decreased, due mainly to lower traffic acquisition
costs, offset in part by a $375 million increase in expenses for payments made
to Nokia related to joint strategic initiatives.
Computing and Gaming
Hardware
Computing and Gaming Hardware revenue decreased
$279 million or 4%, due primarily to lower revenue from the Xbox Platform,
offset in part by Surface revenue. Xbox Platform revenue decreased $1.3 billion
or 22%, due mainly to lower volumes of consoles sold, offset in part by higher
Xbox Live subscription revenue. We shipped 9.8 million Xbox 360 consoles
during fiscal year 2013, compared with 13.0 million Xbox 360 consoles
during fiscal year 2012. Surface revenue was $853 million. The general
availability of Surface RT and Surface Pro started October 26, 2012 and
February 9, 2013, respectively.
Computing
and Gaming Hardware gross margin decreased $1.5 billion or 62%, due to a $1.3
billion or 30% increase in cost of revenue and decreased revenue. Computing and
Gaming Hardware cost of revenue increased, primarily due to $1.9 billion in
product costs associated with Surface, including a charge for Surface RT
inventory adjustments of approximately $900 million. These costs were offset in
part by a $920 million or 24% decrease in Xbox Platform cost of revenue, due
mainly to a decrease in manufacturing and distribution costs associated with
lower volumes of Xbox 360 consoles sold.
D&C Other
D&C
Other revenue increased $415 million or 7%, due mainly to higher advertising
revenue, which increased $213 million or 7% to $3.5 billion. Search advertising
revenue growth was offset in part by a decline in display advertising revenue.
Search advertising revenue grew primarily due to increased revenue per search,
resulting from ongoing improvements in ad products, while display advertising
revenue decreased primarily due to industry-wide market pressure. D&C Other
revenue also increased $202 million or 7%, due mainly to higher volumes of
content resold through our online platforms.
D&C
Other gross margin increased $48 million or 2%, due to increased revenue offset
in part by a $367 million or 9% increase in cost of revenue. D&C Other cost
of revenue increased, due mainly to a $327 million or 28% increase in costs
associated with higher volumes of resale transactions, primarily a $257 million
increase in royalties on Xbox Live content. Increased traffic acquisition costs
were offset in part by lower Yahoo! reimbursement costs.
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except
percentages) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
Percentage |
|
|
Percentage |
|
|||||
|
|
|
|||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|||||||||||||||
|
Licensing |
|
$ |
42,027 |
|
|
$ |
39,686 |
|
|
$ |
37,126 |
|
|
|
6% |
|
|
|
7% |
|
|
Other |
|
|
7,547 |
|
|
|
5,660 |
|
|
|
4,644 |
|
|
|
33% |
|
|
|
22% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total Commercial revenue |
|
$ |
49,574 |
|
|
$ |
45,346 |
|
|
$ |
41,770 |
|
|
|
9% |
|
|
|
9% |
|
|
|
|
|
|
|
||||||||||||||||
|
Gross Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|||||||||||||||
|
Licensing |
|
$ |
38,604 |
|
|
$ |
36,261 |
|
|
$ |
34,463 |
|
|
|
6% |
|
|
|
5% |
|
|
Other |
|
|
1,856 |
|
|
|
921 |
|
|
|
579 |
|
|
|
102% |
|
|
|
59% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total Commercial gross margin |
|
$ |
40,460 |
|
|
$ |
37,182 |
|
|
$ |
35,042 |
|
|
|
9% |
|
|
|
6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2014 compared with fiscal year
2013
Commercial
revenue increased $4.2 billion or 9%, due mainly to growth in revenue from our
on-premises licensing businesses and Commercial Cloud. Collectively, Office
Commercial and Office 365 Commercial revenue grew 8%. Collectively, our server
products revenue, including Microsoft Azure, grew 13%. Commercial gross margin
increased $3.3 billion or 9%, in line with revenue.
Commercial Licensing
Commercial Licensing revenue increased $2.3 billion
or 6%, due primarily to increased revenue from our server products, as well as higher
revenue from Windows Commercial and Office Commercial. Our server products
revenue grew $1.7 billion or 11%, driven primarily by increased sales of
Microsoft SQL Server. Windows Commercial revenue grew $334 million or 10%, due mainly
to increased renewal rates and transactional purchases driven by Windows XP end
of support. Office Commercial revenue grew $253 million or 1%, and was impacted
by customers transitioning to Office 365 Commercial.
Commercial
Licensing gross margin increased $2.3 billion or 6%, in line with revenue
growth.
Commercial Other
Commercial
Other revenue increased $1.9 billion or 33%, due to higher Commercial Cloud
revenue and Enterprise Services revenue. Commercial Cloud revenue grew $1.5
billion or 116%, due mainly to higher revenue from Office 365 Commercial.
Enterprise Services revenue grew $380 million or 9%, due mainly to growth in
Premier Support Services.
Commercial Other gross margin increased $935 million
or 102%, due to higher revenue, offset in part by a $952 million or 20%
increase in cost of revenue. The increase in cost of revenue was due mainly to
higher datacenter expenses, reflecting support of our growing Commercial Cloud.
Fiscal year 2013 compared with fiscal year
2012
Commercial
revenue increased $3.6 billion or 9%, due mainly to growth in revenue from our
on-premises licensing businesses and Commercial Cloud.
Commercial
gross margin increased $2.1 billion or 6%.
Commercial Licensing
Commercial
Licensing revenue increased $2.6 billion or 7%, due to increased revenue from
all major commercial offerings. Server products revenue increased $1.2 billion
or 9%, driven primarily by growth in Microsoft SQL Server, System Center, and
Windows Server. Office Commercial revenue increased $622 million or 4%,
reflecting growth in Office revenue from volume licensing agreements with
software assurance. Windows Commercial revenue increased $379 million or 13%,
reflecting continued support of our platform. Skype revenue increased, due primarily
to including a full year of results in fiscal year 2013.
Commercial
Licensing gross margin increased $1.8 billion or 5%, due to higher revenue,
offset in part by a $762 million or 29% increase in cost of revenue. Commercial
Licensing cost of revenue increased, due to increased costs from all major
commercial offerings, including $287 million higher intellectual property
licensing costs.
Commercial Other
Commercial
Other revenue increased $1.0 billion or 22%, due to higher Commercial Cloud and
Enterprise Services revenue. Commercial Cloud revenue grew $582 million or 82%,
due mainly to higher revenue from Office 365 Commercial. Enterprise Services
revenue grew $434 million or 11%, due to growth in both Premier product support
and consulting services.
Commercial
Other gross margin increased $342 million or 59%, due to higher revenue, offset
in part by a $674 million or 17% increase in cost of revenue. The increase in
cost of revenue was due mainly to higher datacenter expenses, reflecting
investment in online operations infrastructure, and increased headcount-related
expenses, mainly due to higher Enterprise Services headcount supporting revenue
growth.
Corporate and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
Percentage |
|
|
Percentage |
|
|||||
|
|
|
|||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
|
Revenue |
|
$ |
(415 |
) |
|
$ |
403 |
|
|
$ |
(485 |
) |
|
|
(203)% |
|
|
|
183% |
|
|
Gross margin |
|
$ |
(494 |
) |
|
$ |
372 |
|
|
$ |
(582 |
) |
|
|
(233)% |
|
|
|
164% |
|
|
|
|
|||||||||||||||||||
Corporate
and Other revenue comprises certain revenue deferrals, including those related
to product and service upgrade offers and pre-sales of new products to OEMs
prior to general availability.
Fiscal year 2014 compared with fiscal year
2013
Corporate
and Other revenue decreased $818 million, primarily due to the timing of
revenue deferrals. During fiscal year 2014, we deferred a net $349 million of
revenue related to Bundled Offerings. During fiscal year 2013, we recognized
$540 million of previously deferred revenue related to the Windows Upgrade
Offer. The revenue was recognized upon expiration of the offer.
Corporate
and Other gross margin decreased $866 million, due mainly to decreased revenue.
Fiscal year 2013 compared with fiscal year
2012
Corporate
and Other revenue increased $888 million or 183%, primarily due to the timing
of revenue deferrals. During fiscal year 2013, we recognized $540 million of
revenue that had been deferred in fiscal year 2012 related to the Windows
Upgrade Offer. The revenue was recognized upon expiration of the offer.
Corporate
and Other gross margin increased $954 million or 164%, due mainly to increased
revenue.
OPERATING EXPENSES
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
Percentage |
|
|
Percentage |
|
|||||
|
|
|
|||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
|
Research and development |
|
$ |
11,381 |
|
|
$ |
10,411 |
|
|
$ |
9,811 |
|
|
|
9% |
|
|
|
6% |
|
|
As a percent of revenue |
|
|
13% |
|
|
|
13% |
|
|
|
13% |
|
|
|
0ppt |
|
|
|
0ppt |
|
|
|
|
|||||||||||||||||||
Research
and development expenses include payroll, employee benefits, stock-based
compensation expense, and other headcount-related expenses associated with
product development. Research and development expenses also include third-party
development and programming costs, localization costs incurred to translate
software for international markets, and the amortization of purchased software
code.
Fiscal year 2014 compared with fiscal year
2013
Research
and development expenses increased $970 million or 9%, due mainly to increased
investment in new products and services in our Devices engineering group,
including $275 million of NDS expenses, and increased investment in our
Applications and Services engineering group.
Fiscal year 2013 compared with fiscal year
2012
Research
and development expenses increased, reflecting a $460 million or 6% increase in
headcount-related expenses, largely related to the Xbox Platform.
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
Percentage |
|
|
Percentage |
|
|||||
|
|
|
|||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
|
Sales and marketing |
|
$ |
15,811 |
|
|
$ |
15,276 |
|
|
$ |
13,857 |
|
|
|
4% |
|
|
|
10% |
|
|
As a percent of revenue |
|
|
18% |
|
|
|
20% |
|
|
|
19% |
|
|
|
(2)ppt |
|
|
|
1ppt |
|
|
|
|
|||||||||||||||||||
Sales
and marketing expenses include payroll, employee benefits, stock-based
compensation expense, and other headcount-related expenses associated with
sales and marketing personnel and the costs of advertising, promotions, trade
shows, seminars, and other programs.
Fiscal year 2014 compared with fiscal year
2013
Sales and marketing expenses increased $535 million
or 4%, primarily due to NDS expenses and increased investment in sales
resources, offset in part by lower advertising costs. NDS sales and marketing
expenses were $394 million during fiscal year 2014. Average headcount,
excluding NDS, grew 4%. Advertising costs, excluding NDS, declined $403 million
or 15%, primarily due to Windows 8 and Surface costs in the prior year.
Fiscal year 2013 compared with fiscal year
2012
Sales
and marketing expenses grew, reflecting an $898 million increase in advertising
costs associated primarily with Windows 8 and Surface, $181 million higher fees
paid to third-party software advisors, and a $145 million or 2% increase in
headcount-related expenses.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions, except percentages) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
Percentage |
|
|
Percentage |
|
|||||
|
|
|
|||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
|
General and administrative |
|
$ |
4,821 |
|
|
$ |
5,149 |
|
|
$ |
4,569 |
|
|
|
(6)% |
|
|
|
13% |
|
|
As a percent of revenue |
|
|
6% |
|
|
|
7% |
|
|
|
6% |
|
|
|
(1)ppt |
|
|
|
1ppt |
|
|
|
|
|||||||||||||||||||
General
and administrative expenses include payroll, employee benefits, stock-based
compensation expense, severance expense, and other headcount-related expenses
associated with finance, legal, facilities, certain human resources and other
administrative personnel, certain taxes, and legal and other administrative
fees.
Fiscal year 2014 compared with fiscal year 2013
General
and administrative expenses decreased $328 million or 6%, due mainly to the EU
fine in the prior year, offset in part by higher business taxes, higher costs
for internal use software capitalized in the prior year, and NDS expenses. NDS
general and administrative expenses were $77 million during fiscal year 2014.
Fiscal year 2013 compared with fiscal year 2012
General
and administrative expenses increased, primarily due to legal charges for the
EU fine.
Goodwill Impairment
We
test goodwill for impairment annually on May 1 at the reporting unit level
using a discounted cash flow methodology with a peer-based, risk-adjusted
weighted average cost of capital. No impairment of goodwill was identified as
of May 1, 2014 or May 2013. Our goodwill impairment test as of May 1,
2012, indicated that the carrying value of our previous Online Services
Division reporting unit (in Devices and Consumer Other under our current
segment structure) exceeded its estimated fair value. Accordingly, we recorded
a non-cash, non-tax deductible goodwill impairment charge of $6.2 billion
during the three months ended June 30, 2012, reducing the unitŐs goodwill
from $6.4 billion to $223 million.
Integration and Restructuring
Integration
and restructuring expenses consist of transaction fees and direct acquisition
costs, including legal, finance, consulting, and other professional fees.
Integration and restructuring expenses also include employee compensation and
termination costs associated with certain reorganization activities.
Integration
and restructuring expenses were $127 million for fiscal year 2014, reflecting
expenses associated with the acquisition and integration of NDS.
OTHER INCOME (EXPENSE)
The
components of other income (expense) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
|
2014 |
|
|
|
2013 |
|
|
|
2012 |
|
|
|
|
|
|
|||||||||
|
Dividends and interest income |
|
$ |
883 |
|
|
$ |
677 |
|
|
$ |
800 |
|
|
Interest expense |
|
|
(597 |
) |
|
|
(429 |
) |
|
|
(380 |
) |
|
Net recognized gains on investments |
|
|
437 |
|
|
|
116 |
|
|
|
564 |
|
|
Net losses on derivatives |
|
|
(328 |
) |
|
|
(196 |
) |
|
|
(364 |
) |
|
Net losses on foreign currency
remeasurements |
|
|
(165 |
) |
|
|
(74 |
) |
|
|
(117 |
) |
|
Other |
|
|
(169 |
) |
|
|
194 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
61 |
|
|
$ |
288 |
|
|
$ |
504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
use derivative instruments to: manage risks related to foreign currencies,
equity prices, interest rates, and credit; enhance investment returns; and
facilitate portfolio diversification. Gains and losses from changes in fair
values of derivatives that are not designated as hedges are primarily
recognized in other income (expense). Other than those derivatives entered into
for investment purposes, such as commodity contracts, the gains (losses) are
generally economically offset by unrealized gains (losses) in the underlying
available-for-sale securities, which are recorded as a component of other
comprehensive income (ŇOCIÓ) until the securities are sold or
other-than-temporarily impaired, at which time the amounts are reclassified
from accumulated other comprehensive income (ŇAOCIÓ) into other income
(expense).
Fiscal year 2014 compared with fiscal year
2013
Dividends and interest income increased due to
higher portfolio balances. Interest expense increased due to higher outstanding
long-term debt. Net recognized gains on investments increased primarily due to
higher gains on sales of equity securities and lower other-than-temporary
impairments. Other-than-temporary impairments were $106 million in fiscal year
2014, compared with $208 million in fiscal year 2013. Net losses on derivatives
increased due to higher losses on foreign exchange contracts, losses on equity
derivatives as compared to gains in the prior period, offset in part by gains
on commodity and interest rate derivatives as compared to losses in the prior
period. For fiscal year 2014, other reflects recognized losses from certain
joint ventures, offset in part by a recognized gain on a divestiture. For
fiscal year 2013, other reflects recognized gains on divestitures, including
the gain recognized upon the divestiture of our 50% share in the MSNBC joint
venture.
Fiscal year 2013 compared with fiscal year
2012
Dividends
and interest income decreased due to lower yields on our fixed-income
investments, offset in part by higher average portfolio investment balances.
Net recognized gains on investments decreased primarily due to lower gains on
sales of equity and fixed-income securities and a gain recognized on the
partial sale of our Facebook holding in the prior year, offset in part by lower
other-than-temporary impairments. Other-than-temporary impairments were $208
million in fiscal year 2013, compared with $298 million in fiscal year 2012.
Net losses on derivatives decreased due to gains on equity derivatives in the
current fiscal year as compared with losses in the prior fiscal year, and lower
losses on commodity and foreign exchange derivatives as compared to the prior
fiscal year, offset in part by losses on interest-rate derivatives in the
current fiscal year as compared to gains in the prior fiscal year. For the
current year, other reflects recognized gains on divestitures, including the
gain recognized upon the divestiture of our 50% share in the MSNBC joint
venture.
INCOME TAXES
Fiscal year 2014 compared with fiscal year 2013
Our
effective tax rate for fiscal years 2014 and 2013 was approximately 21% and
19%, respectively. Our effective tax rate was lower than the U.S. federal
statutory rate primarily due to earnings taxed at lower rates in foreign
jurisdictions resulting from producing and distributing our products and
services through our foreign regional operations centers in Ireland, Singapore,
and Puerto Rico.
Our fiscal year 2014 effective rate increased by 2% from fiscal year 2013 mainly due to adjustments of $458 million to prior yearsŐ liabilities for intercompany transfer pricing that increased taxable income in more highly taxed jurisdictions, as well as losses incurred by NDS and changes in the geographic mix of our business. This was offset in part by favorable transfer pricing developments in certain foreign tax jurisdictions, primarily Denmark.
Changes
in the mix of income before income taxes between the U.S. and foreign countries
also impacted our effective tax rates and resulted primarily from changes in
the geographic distribution of and changes in consumer demand for our products
and services. We supply our Windows PC operating system to customers through
our U.S. regional operating center, while we supply the Microsoft Office system
and our server products and tools to customers through our foreign regional
operations centers. Windows PC operating system revenue decreased $655 million
in fiscal year 2014, while Microsoft Office system and server products and
tools revenue increased $1.3 billion and $1.6 billion, respectively, during
this same period. In fiscal years 2014 and 2013, our U.S. income before income
taxes was $7.1 billion and $6.7 billion, respectively, and comprised 26% and
25%, respectively, of our income before income taxes. In fiscal years 2014 and
2013, the foreign income before income taxes was $20.7 billion and $20.4
billion, respectively, and comprised 74% and 75%, respectively, of our income
before income taxes.
Tax contingencies and other tax liabilities were $10.4
billion and $9.4 billion as of June 30, 2014 and 2013, respectively, and are
included in other long-term liabilities. This
increase relates primarily to adjustments to prior yearsŐ liabilities for
intercompany transfer pricing and adjustments related to our IRS audits. While we settled a portion
of the I.R.S. audit for tax years 2004 to 2006 during the third quarter of
fiscal year 2011, we remain under audit for those years. In February 2012, the
I.R.S. withdrew its 2011 Revenue Agents Report and reopened the audit phase of
the examination. As of June 30, 2014, the primary unresolved issue relates
to transfer pricing which could have a significant impact on our consolidated financial
statements if not resolved favorably. We have not received a proposed
assessment for the unresolved issues and do not expect a final resolution of
these issues in the next 12 months. Based on the information currently
available, we do not anticipate a significant increase or decrease to our tax
contingencies for these issues. We also continue to be subject to examination
by the I.R.S. for tax years 2007 to 2013.
We
are subject to income tax in many jurisdictions outside the U.S. Our operations
in certain jurisdictions remain subject to examination for tax years 1996 to
2013, some of which are currently under audit by local tax authorities. The
resolutions of these audits are not expected to be material to our consolidated
financial statements.
Fiscal year 2013 compared with fiscal year
2012
Our
effective tax rate for fiscal years 2013 and 2012 was approximately 19% and
24%, respectively. Our effective tax rate was lower than the U.S. federal
statutory rate primarily due to earnings taxed at lower rates in foreign
jurisdictions resulting from producing and distributing our products and services
through our foreign regional operations centers in Ireland, Singapore, and
Puerto Rico.
Our fiscal year 2013
effective rate decreased by 5% from fiscal year 2012 mainly due to a
nonrecurring $6.2 billion non-tax deductible goodwill impairment charge that
was recorded in fiscal year 2012. The goodwill impairment charge increased our
effective tax rate by 10% in fiscal year 2012. In addition, in fiscal years
2013 and 2012, we recognized a reduction of 18% and 21%, respectively, to the
effective tax rate due to foreign earnings taxed at lower rates. The decrease
in our effective tax rate for fiscal year 2013 was primarily offset by a 1%
increase related to the EU fine, which is not tax deductible.
Changes
in the mix of income before income taxes between the U.S. and foreign countries
also impacted our effective tax rates and resulted primarily from changes in
the geographic distribution of and changes in consumer demand for our products
and services. We supply our Windows PC operating system to customers through
our U.S. regional operating center, while we supply the Microsoft Office system
and our server products and tools to customers through our foreign regional
operations centers. Windows PC operating system revenue increased $209 million
in fiscal year 2013, while Microsoft Office system and server products and
tools revenue increased $696 million and $1.2 billion, respectively, during
this same period. In fiscal years 2013 and 2012, our U.S. income before income
taxes was $6.7 billion and $1.6 billion, respectively, and comprised 25% and
7%, respectively, of our income before income taxes. In fiscal years 2013 and
2012, the foreign income before income taxes was $20.4 billion and $20.7
billion, respectively, and comprised 75% and 93%, respectively, of our income
before income taxes. The primary driver for the increase in the U.S. income
before income tax in fiscal year 2013 was the goodwill impairment charge
recorded during the prior year.
Tax contingencies and other tax liabilities were
$9.4 billion and $7.6 billion as of June 30, 2013 and 2012, respectively,
and are included in other long-term liabilities. This increase relates
primarily to transfer pricing, including transfer pricing developments in
certain foreign tax jurisdictions, primarily Denmark. While we settled a
portion of the I.R.S. audit for tax years 2004 to 2006 during the third quarter
of fiscal year 2011, we remain under audit for those years. In February 2012,
the I.R.S. withdrew its 2011 Revenue Agents Report and reopened the audit phase
of the examination. As of June 30, 2013, the primary unresolved issue
relates to transfer pricing which could have a significant impact on our consolidated
financial statements if not resolved favorably. We do not believe it is
reasonably possible that the total amount of unrecognized tax benefits will
significantly increase or decrease within the next 12 months because we do not
believe the remaining open issues will be resolved within the next 12 months.
We also continue to be subject to examination by the I.R.S. for tax years 2007
to 2012.
We
are subject to income tax in many jurisdictions outside the U.S. Our operations
in certain jurisdictions remain subject to examination for tax years 1996 to
2012, some of which are currently under audit by local tax authorities. The
resolutions of these audits are not expected to be material to our consolidated
financial statements.
FINANCIAL CONDITION
Cash, Cash Equivalents, and Investments
Cash,
cash equivalents, and short-term investments totaled $85.7 billion as of
June 30, 2014, compared with $77.0 billion as of June 30, 2013.
Equity and other investments were $14.6 billion as of June 30, 2014,
compared with $10.8 billion as of June 30, 2013. Our short-term
investments are primarily to facilitate liquidity and for capital preservation.
They consist predominantly of highly liquid investment-grade fixed-income
securities, diversified among industries and individual issuers. The
investments are predominantly U.S. dollar-denominated securities, but also include
foreign currency-denominated securities in order to diversify risk. Our
fixed-income investments are exposed to interest rate risk and credit risk. The
credit risk and average maturity of our fixed-income portfolio are managed to
achieve economic returns that correlate to certain fixed-income indices. The
settlement risk related to these investments is insignificant given that the
short-term investments held are primarily highly liquid investment-grade
fixed-income securities.
Of
the cash, cash equivalents, and short-term investments at June 30, 2014, $77.1
billion was held by our foreign subsidiaries and would be subject to material
repatriation tax effects. The amount of cash, cash equivalents, and short-term
investments held by foreign subsidiaries subject to other restrictions on the
free flow of funds (primarily currency and other local regulatory) was $2.6
billion. As of June 30, 2014, approximately 84% of the cash equivalents
and short-term investments held by our foreign subsidiaries were invested in
U.S. government and agency securities, approximately 5% were invested in
corporate notes and bonds of U.S. companies, and approximately 1% were invested
in U.S. mortgage-backed securities, all of which are denominated in U.S.
dollars.
Securities lending
We
lend certain fixed-income and equity securities to increase investment returns.
The loaned securities continue to be carried as investments on our balance
sheet. Cash and/or security interests are received as collateral for the loaned
securities with the amount determined based upon the underlying security lent
and the creditworthiness of the borrower. Cash received is recorded as an asset
with a corresponding liability. Our securities lending payable balance was $558
million as of June 30, 2014. Our average and maximum securities lending
payable balances for the fiscal year were $619 million and $1.3 billion,
respectively. Intra-year variances in the amount of securities loaned are
mainly due to fluctuations in the demand for the securities.
Valuation
In
general, and where applicable, we use quoted prices in active markets for
identical assets or liabilities to determine the fair value of our financial
instruments. This pricing methodology applies to our Level 1 investments, such
as exchange-traded mutual funds, domestic and international equities, and U.S.
government securities. If quoted prices in active markets for identical assets
or liabilities are not available to determine fair value, then we use quoted
prices for similar assets and liabilities or inputs other than the quoted
prices that are observable either directly or indirectly. This pricing
methodology applies to our Level 2 investments such as corporate notes and
bonds, common and preferred stock, foreign government bonds, mortgage-backed
securities, and certificates of deposit. Level 3 investments are valued using
internally developed models with unobservable inputs. Assets and liabilities
measured at fair value on a recurring basis using unobservable inputs are an
immaterial portion of our portfolio.
A
majority of our investments are priced by pricing vendors and are generally
Level 1 or Level 2 investments as these vendors either provide a quoted market
price in an active market or use observable inputs for their pricing without
applying significant adjustments. Broker pricing is used mainly when a quoted
price is not available, the investment is not priced by our pricing vendors, or
when a broker price is more reflective of fair values in the market in which
the investment trades. Our broker-priced investments are generally classified
as Level 2 investments because the broker prices these investments based on
similar assets without applying significant adjustments. In addition, all of
our broker-priced investments have a sufficient level of trading volume to
demonstrate that the fair values used are appropriate for these investments.
Our fair value processes include controls that are designed to ensure
appropriate fair values are recorded. These controls include model validation,
review of key model inputs, analysis of period-over-period fluctuations, and
independent recalculation of prices where appropriate.
Cash Flows
Fiscal year 2014 compared with fiscal year 2013
Cash
flows from operations increased $3.4 billion during the current fiscal year to
$32.2 billion, due mainly to increases in cash received from customers. Cash
used in financing increased $246 million to $8.4 billion, due mainly to a $2.0
billion increase in cash used for common stock repurchases, a $1.4 billion
increase in dividends paid, and a $324 million decrease in proceeds from the
issuance of common stock, offset in part by a $3.4 billion increase in proceeds
from issuances of debt, net of repayments. Cash used in investing decreased $5.0
billion to $18.8 billion, due mainly to a $10.5 billion decrease in cash used
for net investment purchases, sales, and maturities, offset in part by a $4.4
billion increase in cash used for acquisition of companies and purchases of
intangible and other assets, and a $1.2 billion increase in capital
expenditures for property and equipment.
Fiscal year 2013 compared
with fiscal year 2012
Cash
flows from operations decreased $2.8 billion during the current fiscal year to
$28.8 billion, due mainly to changes in working capital, including increases in
inventory and other current assets. Cash used for financing decreased $1.3
billion to $8.1 billion, due mainly to a $3.5 billion increase in proceeds from
issuances of debt, net of repayments, offset in part by a $1.1 billion increase
in dividends paid and a $982 million decrease in proceeds from the issuance of
common stock. Cash used in investing decreased $975 million to $23.8 billion,
due mainly to an $8.5 billion decrease in cash used for acquisitions of
companies and purchases of intangible and other assets, offset in part by a
$5.8 billion increase in cash used for net investment purchases, maturities,
and sales, and a $2.0 billion increase in cash used for additions to property
and equipment.
Debt
We
issued debt to take advantage of favorable pricing and liquidity in the debt
markets, reflecting our credit rating and the low interest rate environment.
The proceeds of these issuances were or will be used for general corporate
purposes, which may include, among other things, funding for working capital,
capital expenditures, repurchases of capital stock, acquisitions, and repayment
of existing debt.
As of June 30,
2014, we had $22.6 billion of issued and outstanding debt, comprising $2.0
billion of short-term debt and $20.6 billion of long-term debt.
Short-term debt
As of June 30,
2014, we had $2.0 billion of commercial paper issued and outstanding, with a
weighted-average interest rate of 0.12% and maturities ranging from 86 days to
91 days. The estimated fair value of this commercial paper approximates its
carrying value.
We
have a $5.0 billion credit facility that expires on November 14, 2018,
which serves as a back-up for our commercial paper program. As of June 30,
2014, we were in compliance with the only financial covenant in the credit
agreement, which requires us to maintain a coverage ratio of at least three
times earnings before interest, taxes, depreciation, and amortization to
interest expense, as defined in the credit agreement. No amounts were drawn
against the credit facility during any of the periods presented.
Long-term debt
As
of June 30, 2014, the total carrying value and estimated fair value of our
long-term debt were $20.6 billion and $21.5 billion, respectively. These
estimated fair values are based on Level 2 inputs.
The components of our long-term debt and the
associated interest rates were as follows as of June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due Date |
|
Face Value |
|
|
Stated Rate |
|
|
Effective Rate |
|
|||
|
|
|
|||||||||||
|
|
|
(In millions) |
|
|
|
|
||||||
|
|
|
|
||||||||||
|
Notes |
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|||||||||
|
September 25, 2015 |
|
$ |
1,750 |
|
|
|
1.625% |
|
|
|
1.795% |
|
|
February 8, 2016 |
|
|
750 |
|
|
|
2.500% |
|
|
|
2.642% |
|
|
November 15, 2017 |
|
|
600 |
|
|
|
0.875% |
|
|
|
1.084% |
|
|
May 1, 2018 |
|
|
450 |
|
|
|
1.000% |
|
|
|
1.106% |
|
|
December 6, 2018 (a) |
|
|
1,250 |
|
|
|
1.625% |
|
|
|
1.824% |
|
|
June 1, 2019 |
|
|
1,000 |
|
|
|
4.200% |
|
|
|
4.379% |
|
|
October 1, 2020 |
|
|
1,000 |
|
|
|
3.000% |
|
|
|
3.137% |
|
|
February 8, 2021 |
|
|
500 |
|
|
|
4.000% |
|
|
|
4.082% |
|
|
December 6, 2021 (b) |
|
|
2,396 |
|
|
|
2.125% |
|
|
|
2.233% |
|
|
November 15, 2022 |
|
|
750 |
|
|
|
2.125% |
|
|
|
2.239% |
|
|
May 1, 2023 |
|
|
1,000 |
|
|
|
2.375% |
|
|
|
2.465% |
|
|
December 15, 2023 (a) |
|
|
1,500 |
|
|
|
3.625% |
|
|
|
3.726% |
|
|
December 6, 2028 (b) |
|
|
2,396 |
|
|
|
3.125% |
|
|
|
3.218% |
|
|
May 2, 2033 (c) |
|
|
753 |
|
|
|
2.625% |
|
|
|
2.690% |
|
|
June 1, 2039 |
|
|
750 |
|
|
|
5.200% |
|
|
|
5.240% |
|
|
October 1, 2040 |
|
|
1,000 |
|
|
|
4.500% |
|
|
|
4.567% |
|
|
February 8, 2041 |
|
|
1,000 |
|
|
|
5.300% |
|
|
|
5.361% |
|
|
November 15, 2042 |
|
|
900 |
|
|
|
3.500% |
|
|
|
3.571% |
|
|
May 1, 2043 |
|
|
500 |
|
|
|
3.750% |
|
|
|
3.829% |
|
|
December 15, 2043 (a) |
|
|
500 |
|
|
|
4.875% |
|
|
|
4.918% |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
20,745 |
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) In
December 2013, we issued $3.3 billion of debt securities.
(b) In
December 2013, we issued Ű3.5 billion of debt securities.
(c) In
April 2013, we issued Ű550 million of debt securities.
The
notes in this table are senior unsecured obligations and rank equally with our
other senior unsecured debt outstanding. Interest on these notes is paid
semi-annually, except for the euro-denominated debt securities on which
interest is paid annually. As of June 30, 2014, the aggregate unamortized
discount for our long-term debt was $100 million.
Unearned Revenue
Unearned
revenue at June 30, 2014 was comprised mainly of unearned revenue from
volume licensing programs. Unearned revenue from volume licensing programs
represents customer billings for multi-year licensing arrangements paid for
either at inception of the agreement or annually at the beginning of each
coverage period and accounted for as subscriptions with revenue recognized
ratably over the coverage period. Unearned revenue at June 30, 2014 also
included payments for: post-delivery support and consulting services to be
performed in the future; Xbox Live subscriptions and prepaid points; Microsoft
Dynamics business solutions products; Office 365 subscriptions; Bundled
Offerings; Skype prepaid credits and subscriptions; and other offerings for
which we have been paid in advance and earn the revenue when we provide the
service or software, or otherwise meet the revenue recognition criteria.
The following table outlines the expected future
recognition of unearned revenue as of June 30, 2014:
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|||
|
|
|
|||
|
Three Months Ending, |
|
|
|
|
|
|
|
|||
|
September 30, 2014 |
|
$ |
8,667 |
|
|
December 31, 2014 |
|
|
7,380 |
|
|
March 31, 2015 |
|
|
4,812 |
|
|
June 30, 2015 |
|
|
2,291 |
|
|
Thereafter |
|
|
2,008 |
|
|
|
|
|||
|
Total |
|
$ |
25,158 |
|
|
|
|
|
|
|
Share Repurchases
On
September 16, 2013, our Board of Directors approved a new share repurchase
program authorizing up to $40.0 billion in share repurchases. The share
repurchase program became effective on October 1, 2013, has no expiration
date, and may be suspended or discontinued at any time without notice. As of
June 30, 2014, $35.1 billion remained of the $40.0 billion share
repurchase program.
During
fiscal year 2014, we repurchased 175 million shares of Microsoft common stock
for $6.4 billion; 128 million shares were repurchased for $4.9 billion under
the share repurchase program approved by our Board of Directors on September 16,
2013 and 47 million shares were repurchased for $1.5 billion under the share
repurchase program that was announced on September 22, 2008 and expired
September 30, 2013. During fiscal years 2013 and 2012, we repurchased 158 million
shares for $4.6 billion and 142 million shares for $4.0 billion,
respectively, under the share repurchase program announced on September 22,
2008. All repurchases were made using cash resources.
Dividends
During fiscal
years 2014 and 2013, our Board of Directors declared the following dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date |
|
Dividend Per Share |
|
|
Record Date |
|
|
Total Amount |
|
|
Payment Date |
|
||||
|
|
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
||||
|
|
|
|
|
|
||||||||||||
|
Fiscal Year 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
September 16, 2013 |
|
$ |
0.28 |
|
|
|
November 21, 2013 |
|
|
$ |
2,332 |
|
|
|
December 12, 2013 |
|
|
November 19, 2013 |
|
$ |
0.28 |
|
|
|
February 20, 2014 |
|
|
$ |
2,322 |
|
|
|
March 13, 2014 |
|
|
March 11, 2014 |
|
$ |
0.28 |
|
|
|
May 15, 2014 |
|
|
$ |
2,309 |
|
|
|
June 12, 2014 |
|
|
June 10, 2014 |
|
$ |
0.28 |
|
|
|
August 21, 2014 |
|
|
$ |
2,307 |
|
|
|
September 11, 2014 |
|
|
|
|
|
|
|
||||||||||||
|
Fiscal Year 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
September 18, 2012 |
|
$ |
0.23 |
|
|
|
November 15, 2012 |
|
|
$ |
1,933 |
|
|
|
December 13, 2012 |
|
|
November 28, 2012 |
|
$ |
0.23 |
|
|
|
February 21, 2013 |
|
|
$ |
1,925 |
|
|
|
March 14, 2013 |
|
|
March 11, 2013 |
|
$ |
0.23 |
|
|
|
May 16, 2013 |
|
|
$ |
1,921 |
|
|
|
June 13, 2013 |
|
|
June 12, 2013 |
|
$ |
0.23 |
|
|
|
August 15, 2013 |
|
|
$ |
1,916 |
|
|
|
September 12, 2013 |
|
|
|
|
|||||||||||||||
Off-Balance Sheet Arrangements
We
provide indemnifications of varying scope and size to certain customers against
claims of intellectual property infringement made by third parties arising from
the use of our products and certain other matters. In evaluating estimated
losses on these indemnifications, we consider factors such as the degree of
probability of an unfavorable outcome and our ability to make a reasonable
estimate of the amount of loss. These obligations did not have a material
impact on our consolidated financial statements during the periods presented.
Contractual Obligations
The following
table summarizes the payments due by fiscal year for our outstanding
contractual obligations as of June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2015 |
|
|
2016-2017 |
|
|
2018-2019 |
|
|
Thereafter |
|
|
Total |
|
|||||
|
|
|
|||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
|
Long-term debt: (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments |
|
$ |
0 |
|
|
$ |
2,500 |
|
|
$ |
3,300 |
|
|
$ |
14,945 |
|
|
$ |
20,745 |
|
|
Interest payments |
|
|
566 |
|
|
|
1,069 |
|
|
|
1,015 |
|
|
|
6,110 |
|
|
|
8,760 |
|
|
Construction commitments (b) |
|
|
880 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
880 |
|
|
Operating leases (c) |
|
|
878 |
|
|
|
1,419 |
|
|
|
1,054 |
|
|
|
1,063 |
|
|
|
4,414 |
|
|
Purchase commitments (d) |
|
|
12,995 |
|
|
|
969 |
|
|
|
657 |
|
|
|
153 |
|
|
|
14,774 |
|
|
Other long-term liabilities (e) |
|
|
0 |
|
|
|
354 |
|
|
|
80 |
|
|
|
393 |
|
|
|
827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total contractual obligations |
|
$ |
15,319 |
|
|
$ |
6,311 |
|
|
$ |
6,106 |
|
|
$ |
22,664 |
|
|
$ |
50,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) See
Note 12 Đ Debt of the Notes to Financial Statements (Part II, Item 8 of
this Form 10-K).
(b) These
amounts represent commitments for the construction of buildings, building
improvements, and leasehold improvements.
(c) These
amounts represent undiscounted future minimum rental commitments under
noncancellable facilities leases.
(d) These
amounts represent purchase commitments, including all open purchase orders and
all contracts that are take-or-pay contracts that are not presented as
construction commitments above.
(e) We
have excluded long-term tax contingencies, other tax liabilities, and deferred
income taxes of $13.3 billion from the amounts presented. We have also excluded
unearned revenue and non-cash items.
Other Planned Uses of
Capital
We
will continue to invest in sales, marketing, product support infrastructure,
and existing and advanced areas of technology. Additions to property and
equipment will continue, including new facilities, data centers, and computer
systems for research and development, sales and marketing, support, and
administrative staff. We expect capital expenditures to increase in coming
years in support of our cloud and devices strategy. We have operating leases
for most U.S. and international sales and support offices and certain
equipment. We have not engaged in any related party transactions or
arrangements with unconsolidated entities or other persons that are reasonably
likely to materially affect liquidity or the availability of capital resources.
Liquidity
We
earn a significant amount of our operating income outside the U.S., which is
deemed to be permanently reinvested in foreign jurisdictions. As a result, as
discussed above under Cash, Cash Equivalents, and Investments, the majority of
our cash, cash equivalents, and short-term investments are held by foreign
subsidiaries. We currently do not intend nor foresee a need to repatriate these
funds. We expect existing domestic cash, cash equivalents, short-term
investments, and cash flows from operations to continue to be sufficient to
fund our domestic operating activities and cash commitments for investing and
financing activities, such as regular quarterly dividends, debt repayment
schedules, and material capital expenditures, for at least the next 12 months
and thereafter for the foreseeable future. In addition, we expect existing
foreign cash, cash equivalents, short-term investments, and cash flows from
operations to continue to be sufficient to fund our foreign operating
activities and cash commitments for investing activities, such as material
capital expenditures, for at least the next 12 months and thereafter for the
foreseeable future.
Should
we require more capital in the U.S. than is generated by our operations
domestically, for example to fund significant discretionary activities, such as
business acquisitions and share repurchases, we could elect to repatriate
future earnings from foreign jurisdictions or raise capital in the U.S. through
debt or equity issuances. These alternatives could result in higher effective
tax rates, increased interest expense, or dilution of our earnings. We have
borrowed funds domestically and continue to believe we have the ability to do
so at reasonable interest rates.
RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
In
December 2011, the Financial Accounting Standards Board (ŇFASBÓ) issued
guidance enhancing disclosure requirements about the nature of an entityŐs
right to offset and related arrangements associated with its financial
instruments. The new guidance requires the disclosure of the gross amounts
subject to rights of set-off, amounts offset in accordance with the accounting
standards followed, and the related net exposure. In January 2013, the FASB
clarified that the scope of this guidance applies to derivatives, repurchase
agreements, and securities lending arrangements that are either offset or
subject to an enforceable master netting arrangement, or similar agreements. We
adopted this new guidance beginning July 1, 2013. Adoption of this new
guidance resulted only in changes to the presentation of Note 5 Đ Derivatives of
the Notes to Financial Statements.
In
February 2013, the FASB issued guidance on disclosure requirements for items
reclassified out of AOCI. This new guidance requires entities to present
(either on the face of the income statement or in the notes to financial
statements) the effects on the line items of the income statement for amounts
reclassified out of AOCI. We adopted this new guidance beginning July 1,
2013. Adoption of this new guidance resulted only in changes to the
presentation of Note 19 Đ Accumulated Other Comprehensive Income of the Notes
to Financial Statements.
Recent Accounting Guidance Not Yet Adopted
In
March 2013, the FASB issued guidance on a parentŐs accounting for the
cumulative translation adjustment upon derecognition of a subsidiary or group
of assets within a foreign entity. This new guidance requires that the parent
release any related cumulative translation adjustment into net income only if
the sale or transfer results in the complete or substantially complete
liquidation of the foreign entity in which the subsidiary or group of assets
had resided. The new guidance will be effective for us beginning July 1,
2014. We do not anticipate material impacts on our consolidated financial
statements upon adoption.
In May 2014, as part of its ongoing efforts to
assist in the convergence of U.S. GAAP and International Financial Reporting
Standards, the FASB issued a new standard related to revenue recognition. Under
the new standard, recognition of revenue occurs when a customer obtains control
of promised goods or services in an amount that reflects the consideration to
which the entity expects to receive in exchange for those goods or services. In
addition, the standard requires disclosure of the nature, amount, timing, and
uncertainty of revenue and cash flows arising from contracts with customers.
The new standard will be effective for us beginning July 1, 2017 and early
adoption is not permitted. We anticipate this standard will have a material
impact on our consolidated financial statements, and we are currently
evaluating its impact.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our
consolidated financial statements and accompanying notes are prepared in accordance
with U.S. GAAP. Preparing consolidated financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses. These estimates and assumptions are
affected by managementŐs application of accounting policies. Critical
accounting policies for us include revenue recognition, impairment of
investment securities, goodwill, research and development costs, contingencies,
income taxes, and inventories.
Revenue Recognition
Revenue
recognition for multiple-element arrangements requires judgment to determine if
multiple elements exist, whether elements can be accounted for as separate
units of accounting, and if so, the fair value for each of the elements.
Judgment is
also required to assess whether future releases of certain software represent
new products or upgrades and enhancements to existing products. Certain volume
licensing arrangements include a perpetual license for current products
combined with rights to receive unspecified future versions of software
products (ŇSoftware AssuranceÓ) and are accounted for as subscriptions, with
billings recorded as unearned revenue and recognized as revenue ratably over
the coverage period.
Software
updates are evaluated on a case-by-case basis to determine whether they meet
the definition of an upgrade, which may require revenue to be deferred and
recognized when the upgrade is delivered. If it is determined that implied
post-contract customer support (ŇPCSÓ) is being provided, revenue from the
arrangement is deferred and recognized over the implied PCS term. If updates
are determined to not meet the definition of an upgrade, revenue is generally
recognized as products are shipped or made available.
Microsoft
enters into arrangements that can include various combinations of software,
services, and hardware. Where elements are delivered over different periods of
time, and when allowed under U.S. GAAP, revenue is allocated to the respective
elements based on their relative selling prices at the inception of the
arrangement, and revenue is recognized as each element is delivered. We use a
hierarchy to determine the fair value to be used for allocating revenue to
elements: (i) vendor-specific objective evidence of fair value (ŇVSOEÓ), (ii)
third-party evidence, and (iii) best estimate of selling price (ŇESPÓ). For
software elements, we follow the industry specific software guidance which only
allows for the use of VSOE in establishing fair value. Generally, VSOE is the
price charged when the deliverable is sold separately or the price established
by management for a product that is not yet sold if it is probable that the
price will not change before introduction into the marketplace. ESPs are
established as best estimates of what the selling prices would be if the
deliverables were sold regularly on a stand-alone basis. Our process for
determining ESPs requires judgment and considers multiple factors that may vary
over time depending upon the unique facts and circumstances related to each
deliverable.
Windows
7 revenue was subject to deferral as a result of the Windows Upgrade Offer,
which started June 2, 2012. The offer provided significantly discounted
rights to purchase Windows 8 Pro to qualifying end-users that purchased Windows
7 PCs during the eligibility period. Microsoft was responsible for delivering
Windows 8 Pro to the end customer. Accordingly, revenue related to the
allocated discount for undelivered Windows 8 was deferred until it was
delivered or the redemption period expired.
Impairment of Investment Securities
We
review investments quarterly for indicators of other-than-temporary impairment.
This determination requires significant judgment. In making this judgment, we
employ a systematic methodology quarterly that considers available quantitative
and qualitative evidence in evaluating potential impairment of our investments.
If the cost of an investment exceeds its fair value, we evaluate, among other
factors, general market conditions, credit quality of debt instrument issuers,
the duration and extent to which the fair value is less than cost, and for
equity securities, our intent and ability to hold, or plans to sell, the
investment. For fixed-income securities, we also evaluate whether we have plans
to sell the security or it is more likely than not that we will be required to
sell the security before recovery. We also consider specific adverse conditions
related to the financial health of and business outlook for the investee,
including industry and sector performance, changes in technology, and
operational and financing cash flow factors. Once a decline in fair value is
determined to be other-than-temporary, an impairment charge is recorded to
other income (expense) and a new cost basis in the investment is established.
If market, industry, and/or investee conditions deteriorate, we may incur
future impairments.
Goodwill
We
allocate goodwill to reporting units based on the reporting unit expected to
benefit from the business combination. We evaluate our reporting units on an
annual basis and, if necessary, reassign goodwill using a relative fair value
allocation approach. Goodwill is tested for impairment at the reporting unit
level (operating segment or one level below an operating segment) on an annual
basis (May 1 for us) and between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying value. These events or circumstances could
include a significant change in the business climate, legal factors, operating
performance indicators, competition, or sale or disposition of a significant
portion of a reporting unit.
Application
of the goodwill impairment test requires judgment, including the identification
of reporting units, assignment of assets and liabilities to reporting units,
assignment of goodwill to reporting units, and determination of the fair value
of each reporting unit. The fair value of each reporting unit is estimated
primarily through the use of a discounted cash flow methodology. This analysis
requires significant judgments, including estimation of future cash flows,
which is dependent on internal forecasts, estimation of the long-term rate of
growth for our business, estimation of the useful life over which cash flows
will occur, and determination of our weighted average cost of capital.
The
estimates used to calculate the fair value of a reporting unit change from year
to year based on operating results, market conditions, and other factors.
Changes in these estimates and assumptions could materially affect the
determination of fair value and goodwill impairment for each reporting unit.
The
valuation of acquired assets and liabilities, including goodwill, resulting
from the acquisition of NDS, is reflective of the enterprise value based on the
long-term financial forecast for the business. In this highly competitive
and volatile market, it is possible that we may not realize our forecasts.
Given the value assigned to goodwill in the purchase price allocation, we will
closely monitor the performance of the business versus the long-term forecast
to determine if any impairments arise.
Research and Development Costs
Costs
incurred internally in researching and developing a computer software product
are charged to expense until technological feasibility has been established for
the product. Once technological feasibility is established, all software costs
are capitalized until the product is available for general release to
customers. Judgment is required in determining when technological feasibility
of a product is established. We have determined that technological feasibility
for our software products is reached after all high-risk development issues
have been resolved through coding and testing. Generally, this occurs shortly
before the products are released to manufacturing. The amortization of these
costs is included in cost of revenue over the estimated life of the products.
Legal and Other Contingencies
The
outcomes of legal proceedings and claims brought against us are subject to
significant uncertainty. An estimated loss from a loss contingency such as a
legal proceeding or claim is accrued by a charge to income if it is probable
that an asset has been impaired or a liability has been incurred and the amount
of the loss can be reasonably estimated. In determining whether a loss should
be accrued we evaluate, among other factors, the degree of probability of an
unfavorable outcome and the ability to make a reasonable estimate of the amount
of loss. Changes in these factors could materially impact our consolidated financial
statements.
Income Taxes
The
objectives of accounting for income taxes are to recognize the amount of taxes
payable or refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been recognized in
an entityŐs financial statements or tax returns. We recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on
the technical merits of the position. The tax benefits recognized in the
financial statements from such a position are measured based on the largest
benefit that has a greater than 50% likelihood of being realized upon ultimate
settlement. Accounting literature also provides guidance on derecognition of
income tax assets and liabilities, classification of current and deferred
income tax assets and liabilities, accounting for interest and penalties
associated with tax positions, and income tax disclosures. Judgment is required
in assessing the future tax consequences of events that have been recognized in
our consolidated financial statements or tax returns. Variations in the actual
outcome of these future tax consequences could materially impact our consolidated
financial statements.
Inventories
Inventories
are stated at average cost, subject to the lower of cost or market. Cost
includes materials, labor, and manufacturing overhead related to the purchase
and production of inventories. We regularly review inventory quantities on
hand, future purchase commitments with our suppliers, and the estimated utility
of our inventory. These reviews include analysis of demand forecasts, product
life cycle status, product development plans, current sales levels, pricing
strategy, and component cost trends. If our review indicates a reduction in
utility below carrying value, we reduce our inventory to a new cost basis
through a charge to cost of revenue. The determination of market value and the
estimated volume of demand used in the lower of cost or market analysis require
significant judgment.
STATEMENT OF MANAGEMENTŐS RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is
responsible for the preparation of the consolidated financial statements and
related information that are presented in this report. The consolidated
financial statements, which include amounts based on managementŐs estimates and
judgments, have been prepared in conformity with accounting principles
generally accepted in the United States of America.
The Company
designs and maintains accounting and internal control systems to provide
reasonable assurance at reasonable cost that assets are safeguarded against
loss from unauthorized use or disposition, and that the financial records are
reliable for preparing consolidated financial statements and maintaining
accountability for assets. These systems are augmented by written policies, an
organizational structure providing division of responsibilities, careful
selection and training of qualified personnel, and a program of internal
audits.
The Company
engaged Deloitte & Touche LLP, an independent registered public
accounting firm, to audit and render an opinion on the consolidated financial
statements and internal control over financial reporting in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
The Board of
Directors, through its Audit Committee, consisting solely of independent
directors of the Company, meets periodically with management, internal
auditors, and our independent registered public accounting firm to ensure that
each is meeting its responsibilities and to discuss matters concerning internal
controls and financial reporting. Deloitte & Touche LLP and the
internal auditors each have full and free access to the Audit Committee.
|
|
|
|
|
Satya
Nadella |
|
Chief
Executive Officer |
|
|
|
Amy E. Hood |
|
Executive
Vice President and Chief Financial Officer |
|
|
|
Frank H.
Brod |
|
Corporate
Vice President, Finance and Administration; |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISKS
We
are exposed to economic risk from foreign currency exchange rates, interest
rates, credit risk, equity prices, and commodity prices. A portion of these
risks is hedged, but they may impact our consolidated financial statements.
Foreign Currency
Certain
forecasted transactions, assets, and liabilities are exposed to foreign
currency risk. We monitor our foreign currency exposures daily and use hedges
where practicable to offset the risks and maximize the economic effectiveness
of our foreign currency positions. Principal currencies hedged include the
euro, Japanese yen, British pound, and Canadian dollar.
Interest Rate
Our
fixed-income portfolio is diversified across credit sectors and maturities,
consisting primarily of investment-grade securities. The credit risk and
average maturity of the fixed-income portfolio is managed to achieve economic
returns that correlate to certain global and domestic fixed-income indices. In
addition, we use ŇTo Be AnnouncedÓ forward purchase commitments of mortgage-backed
assets to gain exposure to agency and mortgage-backed securities.
Equity
Our
equity portfolio consists of global, developed, and emerging market securities
that are subject to market price risk. We manage the securities relative
to certain global and domestic indices and expect their economic risk and
return to correlate with these indices.
Commodity
We
use broad-based commodity exposures to enhance portfolio returns and facilitate
portfolio diversification. Our investment portfolio has exposure to a variety
of commodities, including precious metals, energy, and grain. We manage these
exposures relative to global commodity indices and expect their economic risk
and return to correlate with these indices.
VALUE-AT-RISK
We
use a value-at-risk (ŇVaRÓ) model to estimate and quantify our market risks.
VaR is the expected loss, for a given confidence level, in the fair value of
our portfolio due to adverse market movements over a defined time horizon. The
VaR model is not intended to represent actual losses in fair value, including
determinations of other-than-temporary losses in fair value in accordance with
accounting principles generally accepted in the United States (ŇU.S. GAAPÓ),
but is used as a risk estimation and management tool. The distribution of the
potential changes in total market value of all holdings is computed based on
the historical volatilities and correlations among foreign currency exchange
rates, interest rates, equity prices, and commodity prices, assuming normal
market conditions.
The
VaR is calculated as the total loss that will not be exceeded at the 97.5 percentile
confidence level or, alternatively stated, the losses could exceed the VaR in
25 out of 1,000 cases. Several risk factors are not captured in the model,
including liquidity risk, operational risk, and legal risk.
The following table sets forth the one-day VaR for substantially all of
our positions as of June 30, 2014 and 2013 and for the year ended
June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|||||||||||||||||||
|
|
|
|
|
|||||||||||||||||
|
|
|
June 30, |
|
|
June 30, |
|
|
Year Ended June 30, 2014 |
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Risk Categories |
|
|
|
|
|
|
|
Average |
|
|
High |
|
|
Low |
|
|||||
|
|
|
|
|
|
|
|||||||||||||||
|
Foreign currency |
|
$ |
179 |
|
|
$ |
199 |
|
|
$ |
215 |
|
|
$ |
287 |
|
|
$ |
117 |
|
|
Interest rate |
|
$ |
73 |
|
|
$ |
85 |
|
|
$ |
82 |
|
|
$ |
91 |
|
|
$ |
73 |
|
|
Equity |
|
$ |
176 |
|
|
$ |
181 |
|
|
$ |
208 |
|
|
$ |
246 |
|
|
$ |
173 |
|
|
Commodity |
|
$ |
17 |
|
|
$ |
19 |
|
|
$ |
18 |
|
|
$ |
21 |
|
|
$ |
16 |
|
|
|
|
|||||||||||||||||||
Total one-day
VaR for the combined risk categories was $333 million at June 30, 2014 and
$350 million at June 30, 2013. The total VaR is 25% less at June 30,
2014, and 28% less at June 30, 2013, than the sum of the separate risk
categories in the table above due to the diversification benefit of the
combination of risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INCOME STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Revenue |
|
$ |
86,833 |
|
|
$ |
77,849 |
|
|
$ |
73,723 |
|
|
Cost of revenue |
|
|
26,934 |
|
|
|
20,249 |
|
|
|
17,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Gross margin |
|
|
59,899 |
|
|
|
57,600 |
|
|
|
56,193 |
|
|
Research and development |
|
|
11,381 |
|
|
|
10,411 |
|
|
|
9,811 |
|
|
Sales and marketing |
|
|
15,811 |
|
|
|
15,276 |
|
|
|
13,857 |
|
|
General and administrative |
|
|
4,821 |
|
|
|
5,149 |
|
|
|
4,569 |
|
|
Goodwill impairment |
|
|
0 |
|
|
|
0 |
|
|
|
6,193 |
|
|
Integration and restructuring |
|
|
127 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Operating income |
|
|
27,759 |
|
|
|
26,764 |
|
|
|
21,763 |
|
|
Other income, net |
|
|
61 |
|
|
|
288 |
|
|
|
504 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Income before income taxes |
|
|
27,820 |
|
|
|
27,052 |
|
|
|
22,267 |
|
|
Provision for income taxes |
|
|
5,746 |
|
|
|
5,189 |
|
|
|
5,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Net income |
|
$ |
22,074 |
|
|
$ |
21,863 |
|
|
$ |
16,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.66 |
|
|
$ |
2.61 |
|
|
$ |
2.02 |
|
|
Diluted |
|
$ |
2.63 |
|
|
$ |
2.58 |
|
|
$ |
2.00 |
|
|
|
|
|
|
|||||||||
|
Weighted average shares
outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
8,299 |
|
|
|
8,375 |
|
|
|
8,396 |
|
|
Diluted |
|
|
8,399 |
|
|
|
8,470 |
|
|
|
8,506 |
|
|
|
|
|
|
|||||||||
|
Cash dividends declared per common share |
|
$ |
1.12 |
|
|
$ |
0.92 |
|
|
$ |
0.80 |
|
|
|
|
|||||||||||
See
accompanying notes.
COMPREHENSIVE INCOME STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Net income |
|
$ |
22,074 |
|
|
$ |
21,863 |
|
|
$ |
16,978 |
|
|
Other comprehensive
income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains
(losses) on derivatives (net of tax effects of $(4), $(14), and $137) |
|
|
(35 |
) |
|
|
(26 |
) |
|
|
255 |
|
|
Net unrealized gains
(losses) on investments (net of tax effects of $936, $195, and $(210)) |
|
|
1,737 |
|
|
|
363 |
|
|
|
(390 |
) |
|
Translation adjustments
and other (net of tax effects of $12, $(8), and $(165)) |
|
|
263 |
|
|
|
(16 |
) |
|
|
(306 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Other comprehensive income (loss) |
|
|
1,965 |
|
|
|
321 |
|
|
|
(441 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Comprehensive income |
|
$ |
24,039 |
|
|
$ |
22,184 |
|
|
$ |
16,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
||
|
|
|
|||||||
|
|
|
|
||||||
|
June 30, |
|
2014 |
|
|
2013 |
|
||
|
|
|
|
||||||
|
Assets |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
8,669 |
|
|
$ |
3,804 |
|
|
Short-term investments (including securities loaned of $541 and
$579) |
|
|
77,040 |
|
|
|
73,218 |
|
|
|
|
|
|
|
|
|||
|
Total cash, cash equivalents, and short-term investments |
|
|
85,709 |
|
|
|
77,022 |
|
|
Accounts receivable, net of allowance for doubtful accounts of $301
and $336 |
|
|
19,544 |
|
|
|
17,486 |
|
|
Inventories |
|
|
2,660 |
|
|
|
1,938 |
|
|
Deferred income taxes |
|
|
1,941 |
|
|
|
1,632 |
|
|
Other |
|
|
4,392 |
|
|
|
3,388 |
|
|
|
|
|
|
|
|
|||
|
Total current assets |
|
|
114,246 |
|
|
|
101,466 |
|
|
Property and equipment, net of accumulated depreciation of $14,793
and $12,513 |
|
|
13,011 |
|
|
|
9,991 |
|
|
Equity and other investments |
|
|
14,597 |
|
|
|
10,844 |
|
|
Goodwill |
|
|
20,127 |
|
|
|
14,655 |
|
|
Intangible assets, net |
|
|
6,981 |
|
|
|
3,083 |
|
|
Other long-term assets |
|
|
3,422 |
|
|
|
2,392 |
|
|
|
|
|
|
|
|
|||
|
Total assets |
|
$ |
172,384 |
|
|
$ |
142,431 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholdersŐ equity |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
7,432 |
|
|
$ |
4,828 |
|
|
Short-term debt |
|
|
2,000 |
|
|
|
0 |
|
|
Current portion of long-term debt |
|
|
0 |
|
|
|
2,999 |
|
|
Accrued compensation |
|
|
4,797 |
|
|
|
4,117 |
|
|
Income taxes |
|
|
782 |
|
|
|
592 |
|
|
Short-term unearned revenue |
|
|
23,150 |
|
|
|
20,639 |
|
|
Securities lending payable |
|
|
558 |
|
|
|
645 |
|
|
Other |
|
|
6,906 |
|
|
|
3,597 |
|
|
|
|
|
|
|
|
|||
|
Total current liabilities |
|
|
45,625 |
|
|
|
37,417 |
|
|
Long-term debt |
|
|
20,645 |
|
|
|
12,601 |
|
|
Long-term unearned revenue |
|
|
2,008 |
|
|
|
1,760 |
|
|
Deferred income taxes |
|
|
2,728 |
|
|
|
1,709 |
|
|
Other long-term liabilities |
|
|
11,594 |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|||
|
Total liabilities |
|
|
82,600 |
|
|
|
63,487 |
|
|
|
|
|
|
|
|
|||
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
StockholdersŐ equity: |
|
|
|
|
|
|
|
|
|
Common stock and paid-in
capital Đ shares authorized 24,000; outstanding 8,239 and 8,328 |
|
|
68,366 |
|
|
|
67,306 |
|
|
Retained earnings |
|
|
17,710 |
|
|
|
9,895 |
|
|
Accumulated other comprehensive income |
|
|
3,708 |
|
|
|
1,743 |
|
|
|
|
|
|
|
|
|||
|
Total stockholdersŐ equity |
|
|
89,784 |
|
|
|
78,944 |
|
|
|
|
|
|
|
|
|||
|
Total liabilities and stockholdersŐ equity |
|
$ |
172,384 |
|
|
$ |
142,431 |
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
CASH FLOWS STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
22,074 |
|
|
$ |
21,863 |
|
|
$ |
16,978 |
|
|
Adjustments to reconcile net income to net cash from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment |
|
|
0 |
|
|
|
0 |
|
|
|
6,193 |
|
|
Depreciation, amortization, and other |
|
|
5,212 |
|
|
|
3,755 |
|
|
|
2,967 |
|
|
Stock-based compensation expense |
|
|
2,446 |
|
|
|
2,406 |
|
|
|
2,244 |
|
|
Net recognized losses (gains) on investments and derivatives |
|
|
(109 |
) |
|
|
80 |
|
|
|
(200 |
) |
|
Excess tax benefits from stock-based compensation |
|
|
(271 |
) |
|
|
(209 |
) |
|
|
(93 |
) |
|
Deferred income taxes |
|
|
(331 |
) |
|
|
(19 |
) |
|
|
954 |
|
|
Deferral of unearned revenue |
|
|
44,325 |
|
|
|
44,253 |
|
|
|
36,104 |
|
|
Recognition of unearned revenue |
|
|
(41,739 |
) |
|
|
(41,921 |
) |
|
|
(33,347 |
) |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,120 |
) |
|
|
(1,807 |
) |
|
|
(1,156 |
) |
|
Inventories |
|
|
(161 |
) |
|
|
(802 |
) |
|
|
184 |
|
|
Other current assets |
|
|
(29 |
) |
|
|
(129 |
) |
|
|
493 |
|
|
Other long-term assets |
|
|
(628 |
) |
|
|
(478 |
) |
|
|
(248 |
) |
|
Accounts payable |
|
|
473 |
|
|
|
537 |
|
|
|
(31 |
) |
|
Other current liabilities |
|
|
1,075 |
|
|
|
146 |
|
|
|
410 |
|
|
Other long-term liabilities |
|
|
1,014 |
|
|
|
1,158 |
|
|
|
174 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Net cash from operations |
|
|
32,231 |
|
|
|
28,833 |
|
|
|
31,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Financing |
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of short-term debt, maturities of 90 days or
less, net |
|
|
500 |
|
|
|
0 |
|
|
|
0 |
|
|
Proceeds from issuance of debt |
|
|
10,350 |
|
|
|
4,883 |
|
|
|
0 |
|
|
Repayments of debt |
|
|
(3,888 |
) |
|
|
(1,346 |
) |
|
|
0 |
|
|
Common stock issued |
|
|
607 |
|
|
|
931 |
|
|
|
1,913 |
|
|
Common stock repurchased |
|
|
(7,316 |
) |
|
|
(5,360 |
) |
|
|
(5,029 |
) |
|
Common stock cash dividends paid |
|
|
(8,879 |
) |
|
|
(7,455 |
) |
|
|
(6,385 |
) |
|
Excess tax benefits from stock-based compensation |
|
|
271 |
|
|
|
209 |
|
|
|
93 |
|
|
Other |
|
|
(39 |
) |
|
|
(10 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Net cash used in financing |
|
|
(8,394 |
) |
|
|
(8,148 |
) |
|
|
(9,408 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Investing |
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment |
|
|
(5,485 |
) |
|
|
(4,257 |
) |
|
|
(2,305 |
) |
|
Acquisition of companies,
net of cash acquired, and purchases of intangible and other assets |
|
|
(5,937 |
) |
|
|
(1,584 |
) |
|
|
(10,112 |
) |
|
Purchases of investments |
|
|
(72,690 |
) |
|
|
(75,396 |
) |
|
|
(57,250 |
) |
|
Maturities of investments |
|
|
5,272 |
|
|
|
5,130 |
|
|
|
15,575 |
|
|
Sales of investments |
|
|
60,094 |
|
|
|
52,464 |
|
|
|
29,700 |
|
|
Securities lending payable |
|
|
(87 |
) |
|
|
(168 |
) |
|
|
(394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Net cash used in investing |
|
|
(18,833 |
) |
|
|
(23,811 |
) |
|
|
(24,786 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Effect of exchange rates on cash and cash equivalents |
|
|
(139 |
) |
|
|
(8 |
) |
|
|
(104 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Net change in cash and cash equivalents |
|
|
4,865 |
|
|
|
(3,134 |
) |
|
|
(2,672 |
) |
|
Cash and cash equivalents, beginning of period |
|
|
3,804 |
|
|
|
6,938 |
|
|
|
9,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Cash and cash equivalents, end of period |
|
$ |
8,669 |
|
|
$ |
3,804 |
|
|
$ |
6,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
STOCKHOLDERSŐ EQUITY STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Common stock and paid-in capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
67,306 |
|
|
$ |
65,797 |
|
|
$ |
63,415 |
|
|
Common stock issued |
|
|
607 |
|
|
|
920 |
|
|
|
1,924 |
|
|
Common stock repurchased |
|
|
(2,328 |
) |
|
|
(2,014 |
) |
|
|
(1,714 |
) |
|
Stock-based compensation expense |
|
|
2,446 |
|
|
|
2,406 |
|
|
|
2,244 |
|
|
Stock-based compensation income tax benefits (deficiencies) |
|
|
272 |
|
|
|
190 |
|
|
|
(75 |
) |
|
Other, net |
|
|
63 |
|
|
|
7 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance, end of period |
|
|
68,366 |
|
|
|
67,306 |
|
|
|
65,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Retained earnings (deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
9,895 |
|
|
|
(856 |
) |
|
|
(8,195 |
) |
|
Net income |
|
|
22,074 |
|
|
|
21,863 |
|
|
|
16,978 |
|
|
Common stock cash dividends |
|
|
(9,271 |
) |
|
|
(7,694 |
) |
|
|
(6,721 |
) |
|
Common stock repurchased |
|
|
(4,988 |
) |
|
|
(3,418 |
) |
|
|
(2,918 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance, end of period |
|
|
17,710 |
|
|
|
9,895 |
|
|
|
(856 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Accumulated other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
1,743 |
|
|
|
1,422 |
|
|
|
1,863 |
|
|
Other comprehensive income (loss) |
|
|
1,965 |
|
|
|
321 |
|
|
|
(441 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance, end of period |
|
|
3,708 |
|
|
|
1,743 |
|
|
|
1,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total stockholdersŐ equity |
|
$ |
89,784 |
|
|
$ |
78,944 |
|
|
$ |
66,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 Ń ACCOUNTING POLICIES
Accounting Principles
The
consolidated financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States
of America (ŇU.S. GAAPÓ).
Principles of Consolidation
The
consolidated financial statements include the accounts of Microsoft Corporation
and its subsidiaries. Intercompany transactions and balances have been
eliminated. Equity investments through which we are able to exercise
significant influence over but do not control the investee and are not the
primary beneficiary of the investeeŐs activities are accounted for using the
equity method. Investments through which we are not able to exercise
significant influence over the investee and which do not have readily
determinable fair values are accounted for under the cost method.
Estimates and Assumptions
Preparing
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue, and expenses.
Examples of estimates include: loss contingencies; product warranties; the fair
value of, and/or potential goodwill impairment for, our reporting units;
product life cycles; useful lives of our tangible and intangible assets;
allowances for doubtful accounts; allowances for product returns; the market
value of our inventory; and stock-based compensation forfeiture rates. Examples
of assumptions include: the elements comprising a software arrangement,
including the distinction between upgrades or enhancements and new products;
when technological feasibility is achieved for our products; the potential
outcome of future tax consequences of events that have been recognized in our consolidated
financial statements or tax returns; and determining when investment
impairments are other-than-temporary. Actual results and outcomes may differ
from managementŐs estimates and assumptions.
Recasting of Certain Prior Period
Information
During
the first quarter of fiscal year 2014, we changed our organizational structure
as part of our transformation to a devices and services company. As a result,
information that our chief operating decision maker regularly reviews for
purposes of allocating resources and assessing performance changed. Therefore,
beginning in fiscal year 2014, we reported our financial performance based on
our new segments described in Note 21 Đ Segment Information and Geographic
Data. We have recast certain prior period amounts to conform to the way we
internally managed and monitored segment performance during fiscal year 2014.
This change impacted Note 10 Đ Goodwill, Note 14 Đ Unearned Revenue, and Note
21 Đ Segment Information and Geographic Data, with no impact on our consolidated
financial statements.
Foreign Currencies
Assets
and liabilities recorded in foreign currencies are translated at the exchange rate
on the balance sheet date. Revenue and expenses are translated at average rates
of exchange prevailing during the year. Translation adjustments resulting from
this process are recorded to other comprehensive income (ŇOCIÓ).
Revenue Recognition
Revenue is
recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collectability is probable.
Revenue generally is recognized net of allowances for returns and any taxes
collected from customers and subsequently remitted to governmental authorities.
Revenue
recognition for multiple-element arrangements requires judgment to determine if
multiple elements exist, whether elements can be accounted for as separate
units of accounting, and if so, the fair value for each of the elements.
Microsoft
enters into arrangements that can include various combinations of software,
services, and hardware. Where elements are delivered over different periods of
time, and when allowed under U.S. GAAP, revenue is allocated to the respective
elements based on their relative selling prices at the inception of the
arrangement, and revenue is recognized as each element is delivered. We use a
hierarchy to determine the fair value to be used for allocating revenue to elements:
(i) vendor-specific objective evidence of fair value (ŇVSOEÓ), (ii) third-party
evidence, and (iii) best estimate of selling price (ŇESPÓ). For software
elements, we follow the industry specific software guidance which only allows
for the use of VSOE in establishing fair value. Generally, VSOE is the price
charged when the deliverable is sold separately or the price established by
management for a product that is not yet sold if it is probable that the price
will not change before introduction into the marketplace. ESPs are established
as best estimates of what the selling prices would be if the deliverables were
sold regularly on a stand-alone basis. Our process for determining ESPs requires
judgment and considers multiple factors that may vary over time depending upon
the unique facts and circumstances related to each deliverable.
Revenue for retail packaged products, products
licensed to original equipment manufacturers (ŇOEMsÓ), and perpetual licenses
under certain volume licensing programs generally is recognized as products are
shipped or made available.
Technology
guarantee programs are accounted for as multiple-element arrangements as
customers receive free or significantly discounted rights to use upcoming new
versions of a software product if they license existing versions of the product
during the eligibility period. Revenue is allocated between the existing
product and the new product, and revenue allocated to the new product is
deferred until that version is delivered. The revenue allocation is based on
the VSOE of fair value of the products. The VSOE of fair value for upcoming new
products are based on the price determined by management having the relevant
authority when the element is not yet sold separately, but is expected to be sold
in the near future at the price set by management.
Software
updates that will be provided free of charge are evaluated on a case-by-case
basis to determine whether they meet the definition of an upgrade and create a
multiple-element arrangement, which may require revenue to be deferred and
recognized when the upgrade is delivered, or if it is determined that implied
post-contract customer support (ŇPCSÓ) is being provided, the arrangement is
accounted for as a multiple-element arrangement and all revenue from the
arrangement is deferred and recognized over the implied PCS term when the VSOE
of fair value does not exist. If updates are determined to not meet the
definition of an upgrade, revenue is generally recognized as products are
shipped or made available.
Certain
volume licensing arrangements include a perpetual license for current products
combined with rights to receive unspecified future versions of software
products (ŇSoftware AssuranceÓ), which we have determined are additional
software products and are therefore accounted for as subscriptions, with
billings recorded as unearned revenue and recognized as revenue ratably over
the coverage period. Arrangements that include term-based licenses for current
products with the right to use unspecified future versions of the software
during the coverage period, are also accounted for as subscriptions, with
revenue recognized ratably over the coverage period.
Revenue
from cloud-based services arrangements that allow for the use of a hosted
software product or service over a contractually determined period of time
without taking possession of software are accounted for as subscriptions with
billings recorded as unearned revenue and recognized as revenue ratably over
the coverage period beginning on the date the service is made available to
customers. Revenue from cloud-based services arrangements that are provided on
a consumption basis (for example, the amount of storage used in a particular
period) is recognized commensurate with the customer utilization of such
resources.
Some
volume licensing arrangements include time-based subscriptions for cloud-based
services and software offerings that are accounted for as subscriptions. These
arrangements are considered multiple-element arrangements. However, because all
elements are accounted for as subscriptions and have the same coverage period
and delivery pattern, they have the same revenue recognition timing.
Revenue
related to phones, Surface, Xbox consoles, games published by us, and other
hardware components is generally recognized when ownership is transferred to
the resellers or to end customers when selling directly through Microsoft
retail stores and online marketplaces. A portion of revenue may be deferred
when these products are combined with software elements, and/or services. Revenue
related to licensing for games published by third parties for use on the Xbox
consoles is recognized when games are manufactured by the game publishers.
Display
advertising revenue is recognized as advertisements are displayed. Search
advertising revenue is recognized when the ad appears in the search results or
when the action necessary to earn the revenue has been completed. Consulting
services revenue is recognized as services are rendered, generally based on the
negotiated hourly rate in the consulting arrangement and the number of hours
worked during the period. Consulting revenue for fixed-price services
arrangements is recognized as services are provided. Revenue from prepaid points
redeemable for the purchase of software or services is recognized upon
redemption of the points and delivery of the software or services.
Cost of Revenue
Cost
of revenue includes: manufacturing and distribution costs for products sold and
programs licensed; operating costs related to product support service centers
and product distribution centers; costs incurred to include software on PCs
sold by OEMs, to drive traffic to our websites, and to acquire online
advertising space (Ňtraffic acquisition costsÓ); costs incurred to support and
maintain Internet-based products and services, including datacenter costs and
royalties; warranty costs; inventory valuation adjustments; costs associated
with the delivery of consulting services; and the amortization of capitalized
research and development costs. Capitalized research and development costs are
amortized over the estimated lives of the products.
Product Warranty
We
provide for the estimated costs of fulfilling our obligations under hardware
and software warranties at the time the related revenue is recognized. For
hardware warranties, we estimate the costs based on historical and projected
product failure rates, historical and projected repair costs, and knowledge of
specific product failures (if any). The specific hardware warranty terms and
conditions vary depending upon the product sold and the country in which we do
business, but generally include parts and labor over a period generally ranging
from 90 days to three years. For software warranties, we estimate the
costs to provide bug fixes, such as security patches, over the estimated life
of the software. We regularly reevaluate our estimates to assess the adequacy
of the recorded warranty liabilities and adjust the amounts as necessary.
Research and Development
Research
and development expenses include payroll, employee benefits, stock-based
compensation expense, and other headcount-related expenses associated with
product development. Research and development expenses also include third-party
development and programming costs, localization costs incurred to translate
software for international markets, and the amortization of purchased software
code and services content. Such costs related to software development are
included in research and development expense until the point that technological
feasibility is reached, which for our software products, is generally shortly
before the products are released to manufacturing. Once technological
feasibility is reached, such costs are capitalized and amortized to cost of
revenue over the estimated lives of the products.
Sales and Marketing
Sales
and marketing expenses include payroll, employee benefits, stock-based
compensation expense, and other headcount-related expenses associated with
sales and marketing personnel, and the costs of advertising, promotions, trade
shows, seminars, and other programs. Advertising costs are expensed as
incurred. Advertising expense was $2.3 billion, $2.6 billion, and $1.6 billion
in fiscal years 2014, 2013, and 2012, respectively.
Stock-Based Compensation
We
measure stock-based compensation cost at the grant date based on the fair value
of the award and recognize it as expense, net of estimated forfeitures, over
the vesting or service period, as applicable, of the stock award (generally
four to five years) using the straight-line method.
Employee Stock Purchase Plan
Shares
of our common stock may be purchased by employees at three-month intervals at
90% of the fair market value of the stock on the last day of each three-month
period. Compensation expense for the employee stock purchase plan is measured
as the discount the employee is entitled to upon purchase and is recognized in
the period of purchase.
Income Taxes
Income
tax expense includes U.S. and international income taxes, the provision for
U.S. taxes on undistributed earnings of international subsidiaries not deemed
to be permanently invested, and interest and penalties on uncertain tax
positions. Certain income and expenses are not reported in tax returns and
financial statements in the same year. The tax effect of such temporary
differences is reported as deferred income taxes. Deferred tax assets are
reported net of a valuation allowance when it is more likely than not that a
tax benefit will not be realized. The deferred income taxes are classified as
current or long-term based on the classification of the related asset or
liability.
Fair Value Measurements
We account for certain assets and liabilities at
fair value. The hierarchy below lists three levels of fair value based on the
extent to which inputs used in measuring fair value are observable in the
market. We categorize each of our fair value measurements in one of these
three levels based on the lowest level input that is significant to the fair
value measurement in its entirety. These levels are:
Ą Level
1 Đ inputs are based upon unadjusted quoted prices for identical
instruments traded in active markets. Our Level 1 non-derivative investments
primarily include U.S. government securities, domestic and international
equities, and actively traded mutual funds. Our Level 1 derivative assets
and liabilities include those actively traded on exchanges.
Ą Level
2 Đ inputs are based upon quoted prices for similar instruments in active
markets, quoted prices for identical or similar instruments in markets that are
not active, and model-based valuation techniques (e.g. the Black-Scholes model)
for which all significant inputs are observable in the market or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities. Where applicable, these models project future cash flows
and discount the future amounts to a present value using market-based
observable inputs including interest rate curves, credit spreads, foreign
exchange rates, and forward and spot prices for currencies and commodities. Our
Level 2 non-derivative investments consist primarily of corporate notes and
bonds, common and preferred stock, mortgage-backed securities, certificates of
deposit, and foreign government bonds. Our Level 2 derivative assets and
liabilities primarily include certain over-the-counter option and swap
contracts.
Ą Level
3 Đ inputs are generally unobservable and typically reflect managementŐs
estimates of assumptions that market participants would use in pricing the
asset or liability. The fair values are therefore determined using model-based
techniques, including option pricing models and discounted cash flow models.
Our Level 3 non-derivative assets primarily comprise investments in common and
preferred stock and goodwill when it is recorded at fair value due to an
impairment charge. Unobservable inputs used in the models are significant
to the fair values of the assets and liabilities.
We
measure certain assets, including our cost and equity method investments, at
fair value on a nonrecurring basis when they are deemed to be
other-than-temporarily impaired. The fair values of these investments are
determined based on valuation techniques using the best information available,
and may include quoted market prices, market comparables, and discounted cash
flow projections. An impairment charge is recorded when the cost of the investment
exceeds its fair value and this condition is determined to be
other-than-temporary.
Our
other current financial assets and our current financial liabilities have fair
values that approximate their carrying values.
Financial Instruments
We
consider all highly liquid interest-earning investments with a maturity of
three months or less at the date of purchase to be cash equivalents. The fair
values of these investments approximate their carrying values. In general,
investments with original maturities of greater than three months and remaining
maturities of less than one year are classified as short-term investments.
Investments with maturities beyond one year may be classified as short-term
based on their highly liquid nature and because such marketable securities
represent the investment of cash that is available for current operations. All
cash equivalents and short-term investments are classified as
available-for-sale and realized gains and losses are recorded using the
specific identification method. Changes in market value, excluding
other-than-temporary impairments, are reflected in OCI.
Equity
and other investments classified as long-term include both debt and equity
instruments. With the exception of certain corporate notes that are classified
as held-to-maturity, debt and publicly-traded equity securities are classified
as available-for-sale and realized gains and losses are recorded using the
specific identification method. Changes in the market value of
available-for-sale securities, excluding other-than-temporary impairments, are
reflected in OCI. Held-to-maturity investments are recorded and held at
amortized cost. Common and preferred stock and other investments that are
restricted for more than one year or are not publicly traded are recorded at
cost or using the equity method.
We
lend certain fixed-income and equity securities to increase investment returns.
The loaned securities continue to be carried as investments on our balance
sheet. Cash and/or security interests are received as collateral for the loaned
securities with the amount determined based upon the underlying security lent
and the creditworthiness of the borrower. Cash received is recorded as an asset
with a corresponding liability.
Investments
are considered to be impaired when a decline in fair value is judged to be
other-than-temporary. Fair value is calculated based on publicly available
market information or other estimates determined by management. We employ a
systematic methodology on a quarterly basis that considers available
quantitative and qualitative evidence in evaluating potential impairment of our
investments. If the cost of an investment exceeds its fair value, we evaluate,
among other factors, general market conditions, credit quality of debt
instrument issuers, the duration and extent to which the fair value is less
than cost, and for equity securities, our intent and ability to hold, or plans
to sell, the investment. For fixed-income securities, we also evaluate whether
we have plans to sell the security or it is more likely than not that we will
be required to sell the security before recovery. We also consider specific
adverse conditions related to the financial health of and business outlook for
the investee, including industry and sector performance, changes in technology,
and operational and financing cash flow factors. Once a decline in fair value
is determined to be other-than-temporary, an impairment charge is recorded to
other income (expense) and a new cost basis in the investment is established.
Derivative
instruments are recognized as either assets or liabilities and are measured at
fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
For
derivative instruments designated as fair value hedges, the gains (losses) are
recognized in earnings in the periods of change together with the offsetting
losses (gains) on the hedged items attributed to the risk being hedged. For
options designated as fair value hedges, changes in the time value are excluded
from the assessment of hedge effectiveness and are recognized in earnings.
For
derivative instruments designated as cash-flow hedges, the effective portion of
the gains (losses) on the derivatives is initially reported as a component of
OCI and is subsequently recognized in earnings when the hedged exposure is
recognized in earnings. For options designated as cash-flow hedges, changes in
the time value are excluded from the assessment of hedge effectiveness and are
recognized in earnings. Gains (losses) on derivatives representing either hedge
components excluded from the assessment of effectiveness or hedge
ineffectiveness are recognized in earnings.
For
derivative instruments that are not designated as hedges, gains (losses) from
changes in fair values are primarily recognized in other income (expense).
Other than those derivatives entered into for investment purposes, such as
commodity contracts, the gains (losses) are generally economically offset by
unrealized gains (losses) in the underlying available-for-sale securities,
which are recorded as a component of OCI until the securities are sold or
other-than-temporarily impaired, at which time the amounts are reclassified
from accumulated other comprehensive income (ŇAOCIÓ) into other income
(expense).
Allowance for Doubtful
Accounts
The allowance for doubtful accounts reflects our
best estimate of probable losses inherent in the accounts receivable balance.
We determine the allowance based on known troubled accounts, historical
experience, and other currently available evidence. Activity in the allowance
for doubtful accounts was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Balance, beginning of period |
|
$ |
336 |
|
|
$ |
389 |
|
|
$ |
333 |
|
|
Charged to costs and other |
|
|
16 |
|
|
|
4 |
|
|
|
115 |
|
|
Write-offs |
|
|
(51 |
) |
|
|
(57 |
) |
|
|
(59 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance, end of period |
|
$ |
301 |
|
|
$ |
336 |
|
|
$ |
389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
Inventories
are stated at average cost, subject to the lower of cost or market. Cost
includes materials, labor, and manufacturing overhead related to the purchase
and production of inventories. We regularly review inventory quantities on
hand, future purchase commitments with our suppliers, and the estimated utility
of our inventory. If our review indicates a reduction in utility below carrying
value, we reduce our inventory to a new cost basis through a charge to cost of
revenue. The determination of market
value and the estimated volume of demand used in the lower of cost or market
analysis require significant judgment.
Property and Equipment
Property
and equipment is stated at cost and depreciated using the straight-line method
over the shorter of the estimated useful life of the asset or the lease term.
The estimated useful lives of our property and equipment are generally as
follows: computer software developed or acquired for internal use, three to
seven years; computer equipment, two to three years; buildings and
improvements, five to 15 years; leasehold improvements, two to 20 years; and
furniture and equipment, one to 10 years. Land is not depreciated.
Goodwill
Goodwill
is tested for impairment at the reporting unit level (operating segment or one
level below an operating segment) on an annual basis (May 1 for us) and between
annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying value.
Intangible Assets
All
of our intangible assets are subject to amortization and are amortized using
the straight-line method over their estimated period of benefit, ranging from
one to 15 years. We evaluate the recoverability of intangible assets
periodically by taking into account events or circumstances that may warrant
revised estimates of useful lives or that indicate the asset may be impaired.
Recent Accounting Guidance
Recently adopted accounting guidance
In
December 2011, the Financial Accounting Standards Board (ŇFASBÓ) issued
guidance enhancing disclosure requirements about the nature of an entityŐs
right to offset and related arrangements associated with its financial
instruments. The new guidance requires the disclosure of the gross amounts
subject to rights of set-off, amounts offset in accordance with the accounting
standards followed, and the related net exposure. In January 2013, the FASB
clarified that the scope of this guidance applies to derivatives, repurchase
agreements, and securities lending arrangements that are either offset or
subject to an enforceable master netting arrangement, or similar agreements. We
adopted this new guidance beginning July 1, 2013. Adoption of this new
guidance resulted only in changes to the presentation of Note 5 Đ Derivatives.
In
February 2013, the FASB issued guidance on disclosure requirements for items
reclassified out of AOCI. This new guidance requires entities to present
(either on the face of the income statement or in the notes to financial
statements) the effects on the line items of the income statement for amounts
reclassified out of AOCI. We adopted this new guidance beginning July 1,
2013. Adoption of this new guidance resulted only in changes to the
presentation of Note 19 Đ Accumulated Other Comprehensive Income.
Recent accounting guidance not yet adopted
In
March 2013, the FASB issued guidance on a parentŐs accounting for the
cumulative translation adjustment upon derecognition of a subsidiary or group
of assets within a foreign entity. This new guidance requires that the parent
release any related cumulative translation adjustment into net income only if
the sale or transfer results in the complete or substantially complete
liquidation of the foreign entity in which the subsidiary or group of assets
had resided. The new guidance will be effective for us beginning July 1,
2014. We do not anticipate material impacts on our consolidated financial statements
upon adoption.
In
May 2014, as part of its ongoing efforts to assist in the convergence of U.S.
GAAP and International Financial Reporting Standards, the FASB issued a new
standard related to revenue recognition. Under the new standard, recognition of
revenue occurs when a customer obtains control of promised goods or services in
an amount that reflects the consideration to which the entity expects to
receive in exchange for those goods or services. In addition, the standard
requires disclosure of the nature, amount, timing, and uncertainty of revenue
and cash flows arising from contracts with customers. The new standard will be effective
for us beginning July 1, 2017 and early adoption is not permitted. We
anticipate this standard will have a material impact, and we are currently
evaluating the impact this standard will have on our consolidated financial
statements.
NOTE 2 Ń EARNINGS PER SHARE
Basic earnings per share (ŇEPSÓ) is computed based
on the weighted average number of shares of common stock outstanding during the
period. Diluted EPS is computed based on the weighted average number of shares
of common stock plus the effect of dilutive potential common shares outstanding
during the period using the treasury stock method. Dilutive potential common
shares include outstanding stock options and stock awards.
The components of basic and diluted EPS are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except earnings per share) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Net income available for common
shareholders (A) |
|
$ |
22,074 |
|
|
$ |
21,863 |
|
|
$ |
16,978 |
|
|
|
|
|
|
|||||||||
|
Weighted average outstanding shares of
common stock (B) |
|
|
8,299 |
|
|
|
8,375 |
|
|
|
8,396 |
|
|
Dilutive effect of stock-based awards |
|
|
100 |
|
|
|
95 |
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Common stock and common stock equivalents
(C) |
|
|
8,399 |
|
|
|
8,470 |
|
|
|
8,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Basic (A/B) |
|
$ |
2.66 |
|
|
$ |
2.61 |
|
|
$ |
2.02 |
|
|
Diluted (A/C) |
|
$ |
2.63 |
|
|
$ |
2.58 |
|
|
$ |
2.00 |
|
|
|
|
|||||||||||
Anti-dilutive
stock-based awards excluded from the calculations of diluted EPS were
immaterial during the periods presented.
NOTE 3 Ń OTHER INCOME (EXPENSE)
The components of other income (expense) were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Dividends and interest income |
|
$ |
883 |
|
|
$ |
677 |
|
|
$ |
800 |
|
|
Interest expense |
|
|
(597 |
) |
|
|
(429 |
) |
|
|
(380 |
) |
|
Net recognized gains on investments |
|
|
437 |
|
|
|
116 |
|
|
|
564 |
|
|
Net losses on derivatives |
|
|
(328 |
) |
|
|
(196 |
) |
|
|
(364 |
) |
|
Net losses on foreign currency
remeasurements |
|
|
(165 |
) |
|
|
(74 |
) |
|
|
(117 |
) |
|
Other |
|
|
(169 |
) |
|
|
194 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
61 |
|
|
$ |
288 |
|
|
$ |
504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following are details of net recognized gains
(losses) on investments during the periods reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Other-than-temporary impairments of
investments |
|
$ |
(106 |
) |
|
$ |
(208 |
) |
|
$ |
(298 |
) |
|
Realized gains from sales of
available-for-sale securities |
|
|
776 |
|
|
|
489 |
|
|
|
1,418 |
|
|
Realized losses from sales of
available-for-sale securities |
|
|
(233 |
) |
|
|
(165 |
) |
|
|
(556 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
437 |
|
|
$ |
116 |
|
|
$ |
564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4 Ń INVESTMENTS
Investment
Components
The components
of investments, including associated derivatives, but excluding
held-to-maturity investments, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Cost Basis |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Recorded Basis |
|
|
Cash and Cash Equivalents |
|
|
Short-term Investments |
|
|
Equity and Other Investments |
|
|||||||
|
|
|
|||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
June 30, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Cash |
|
$ |
4,980 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
4,980 |
|
|
$ |
4,980 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
Mutual funds |
|
|
590 |
|
|
|
0 |
|
|
|
0 |
|
|
|
590 |
|
|
|
590 |
|
|
|
0 |
|
|
|
0 |
|
|
Commercial paper |
|
|
189 |
|
|
|
0 |
|
|
|
0 |
|
|
|
189 |
|
|
|
89 |
|
|
|
100 |
|
|
|
0 |
|
|
Certificates of deposit |
|
|
1,197 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,197 |
|
|
|
865 |
|
|
|
332 |
|
|
|
0 |
|
|
U.S. government and
agency securities |
|
|
66,952 |
|
|
|
103 |
|
|
|
(29 |
) |
|
|
67,026 |
|
|
|
109 |
|
|
|
66,917 |
|
|
|
0 |
|
|
Foreign government bonds |
|
|
3,328 |
|
|
|
17 |
|
|
|
(10 |
) |
|
|
3,335 |
|
|
|
2,027 |
|
|
|
1,308 |
|
|
|
0 |
|
|
Mortgage-backed
securities |
|
|
991 |
|
|
|
30 |
|
|
|
(2 |
) |
|
|
1,019 |
|
|
|
0 |
|
|
|
1,019 |
|
|
|
0 |
|
|
Corporate notes and bonds |
|
|
6,845 |
|
|
|
191 |
|
|
|
(9 |
) |
|
|
7,027 |
|
|
|
9 |
|
|
|
7,018 |
|
|
|
0 |
|
|
Municipal securities |
|
|
287 |
|
|
|
45 |
|
|
|
0 |
|
|
|
332 |
|
|
|
0 |
|
|
|
332 |
|
|
|
0 |
|
|
Common and preferred stock |
|
|
6,785 |
|
|
|
5,207 |
|
|
|
(81 |
) |
|
|
11,911 |
|
|
|
0 |
|
|
|
0 |
|
|
|
11,911 |
|
|
Other investments |
|
|
1,164 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,164 |
|
|
|
0 |
|
|
|
14 |
|
|
|
1,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
93,308 |
|
|
$ |
5,593 |
|
|
$ |
(131 |
) |
|
$ |
98,770 |
|
|
$ |
8,669 |
|
|
$ |
77,040 |
|
|
$ |
13,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Cost Basis |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Recorded Basis |
|
|
Cash and Cash Equivalents |
|
|
Short-term Investments |
|
|
Equity and Other Investments |
|
|||||||
|
|
|
|||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
June 30, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Cash |
|
$ |
1,967 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
1,967 |
|
|
$ |
1,967 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
Mutual funds |
|
|
868 |
|
|
|
0 |
|
|
|
0 |
|
|
|
868 |
|
|
|
868 |
|
|
|
0 |
|
|
|
0 |
|
|
Commercial paper |
|
|
603 |
|
|
|
0 |
|
|
|
0 |
|
|
|
603 |
|
|
|
214 |
|
|
|
389 |
|
|
|
0 |
|
|
Certificates of deposit |
|
|
994 |
|
|
|
0 |
|
|
|
0 |
|
|
|
994 |
|
|
|
609 |
|
|
|
385 |
|
|
|
0 |
|
|
U.S. government and
agency securities |
|
|
64,934 |
|
|
|
47 |
|
|
|
(84 |
) |
|
|
64,897 |
|
|
|
146 |
|
|
|
64,751 |
|
|
|
0 |
|
|
Foreign government bonds |
|
|
900 |
|
|
|
16 |
|
|
|
(41 |
) |
|
|
875 |
|
|
|
0 |
|
|
|
875 |
|
|
|
0 |
|
|
Mortgage-backed
securities |
|
|
1,258 |
|
|
|
43 |
|
|
|
(13 |
) |
|
|
1,288 |
|
|
|
0 |
|
|
|
1,288 |
|
|
|
0 |
|
|
Corporate notes and bonds |
|
|
4,993 |
|
|
|
169 |
|
|
|
(40 |
) |
|
|
5,122 |
|
|
|
0 |
|
|
|
5,122 |
|
|
|
0 |
|
|
Municipal securities |
|
|
350 |
|
|
|
36 |
|
|
|
(1 |
) |
|
|
385 |
|
|
|
0 |
|
|
|
385 |
|
|
|
0 |
|
|
Common and preferred
stock |
|
|
6,931 |
|
|
|
2,938 |
|
|
|
(281 |
) |
|
|
9,588 |
|
|
|
0 |
|
|
|
0 |
|
|
|
9,588 |
|
|
Other investments |
|
|
1,279 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,279 |
|
|
|
0 |
|
|
|
23 |
|
|
|
1,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
85,077 |
|
|
$ |
3,249 |
|
|
$ |
(460 |
) |
|
$ |
87,866 |
|
|
$ |
3,804 |
|
|
$ |
73,218 |
|
|
$ |
10,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
addition to the investments in the table above, we also own corporate notes
that were purchased in connection with our agreement to lend $2.0 billion to
the group that completed their acquisition of Dell on October 29, 2013.
These corporate notes are classified as held-to-maturity investments and are
included in equity and other investments on the balance sheet. As of
June 30, 2014, the amortized cost, recorded basis, and estimated fair
value of these corporate notes was $1.5 billion, $1.5 billion, and $1.7
billion, respectively, while their associated gross unrecognized holding gains were
$164 million.
As
of June 30, 2014 and 2013, the recorded bases of common and preferred
stock that are restricted for more than one year or are not publicly traded
were $520 million and $395 million, respectively. These investments are carried
at cost and are reviewed quarterly for indicators of other-than-temporary
impairment. It is not practicable for us to reliably estimate the fair value of
these investments.
Unrealized Losses on Investments
Investments, excluding those held-to-maturity, with
continuous unrealized losses for less than 12 months and 12 months or greater
and their related fair values were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or Greater |
|
|
|
|
|
Total |
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
(In millions) |
|
Fair Value |
|
|
Unrealized |
|
|
Fair Value |
|
|
Unrealized |
|
|
Total |
|
|
||||||||
|
|
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
June 30, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
U.S. government and agency securities |
|
$ |
4,161 |
|
|
$ |
(29 |
) |
|
$ |
850 |
|
|
$ |
0 |
|
|
$ |
5,011 |
|
|
$ |
(29 |
) |
|
Foreign government bonds |
|
|
566 |
|
|
|
(4 |
) |
|
|
21 |
|
|
|
(6 |
) |
|
|
587 |
|
|
|
(10 |
) |
|
Mortgage-backed securities |
|
|
120 |
|
|
|
0 |
|
|
|
61 |
|
|
|
(2 |
) |
|
|
181 |
|
|
|
(2 |
) |
|
Corporate notes and bonds |
|
|
1,154 |
|
|
|
(8 |
) |
|
|
34 |
|
|
|
(1 |
) |
|
|
1,188 |
|
|
|
(9 |
) |
|
Common and preferred stock |
|
|
463 |
|
|
|
(48 |
) |
|
|
257 |
|
|
|
(33 |
) |
|
|
720 |
|
|
|
(81 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
6,464 |
|
|
$ |
(89 |
) |
|
$ |
1,223 |
|
|
$ |
(42 |
) |
|
$ |
7,687 |
|
|
$ |
(131 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or Greater |
|
|
|
|
|
Total |
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
(In millions) |
|
Fair Value |
|
|
Unrealized |
|
|
Fair Value |
|
|
Unrealized |
|
|
Total |
|
|
||||||||
|
|
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
June 30, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
U.S. government and agency securities |
|
$ |
2,208 |
|
|
$ |
(84 |
) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
2,208 |
|
|
$ |
(84 |
) |
|
Foreign government bonds |
|
|
589 |
|
|
|
(18 |
) |
|
|
69 |
|
|
|
(23 |
) |
|
|
658 |
|
|
|
(41 |
) |
|
Mortgage-backed securities |
|
|
357 |
|
|
|
(12 |
) |
|
|
39 |
|
|
|
(1 |
) |
|
|
396 |
|
|
|
(13 |
) |
|
Corporate notes and bonds |
|
|
1,142 |
|
|
|
(38 |
) |
|
|
27 |
|
|
|
(2 |
) |
|
|
1,169 |
|
|
|
(40 |
) |
|
Municipal securities |
|
|
44 |
|
|
|
(1 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
44 |
|
|
|
(1 |
) |
|
Common and preferred stock |
|
|
1,166 |
|
|
|
(168 |
) |
|
|
409 |
|
|
|
(113 |
) |
|
|
1,575 |
|
|
|
(281 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
5,506 |
|
|
$ |
(321 |
) |
|
$ |
544 |
|
|
$ |
(139 |
) |
|
$ |
6,050 |
|
|
$ |
(460 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2014, we did not hold any held-to-maturity investments that are in
an unrealized loss position.
Unrealized
losses from fixed-income securities are primarily attributable to changes in
interest rates. Unrealized losses from domestic and international equities are
due to market price movements. Management does not believe any remaining
unrealized losses represent other-than-temporary impairments based on our
evaluation of available evidence as of June 30, 2014.
Debt Investment Maturities
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Cost Basis |
|
|
Estimated Fair Value |
|
||
|
|
|
|||||||
|
|
|
|
||||||
|
June 30, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Due in one year or less |
|
$ |
28,681 |
|
|
$ |
28,719 |
|
|
Due after one year through five years |
|
|
46,734 |
|
|
|
46,881 |
|
|
Due after five years through 10 years |
|
|
2,910 |
|
|
|
2,987 |
|
|
Due after 10 years |
|
|
1,464 |
|
|
|
1,538 |
|
|
|
|
|
|
|
|
|||
|
Total (a) |
|
$ |
79,789 |
|
|
$ |
80,125 |
|
|
|
|
|
|
|
|
|
|
|
(a) Excludes
held-to-maturity investments due October 31, 2023 with a cost basis and
estimated fair value at June 30, 2014 of $1.5 billion and $1.7 billion,
respectively.
NOTE 5 Ń DERIVATIVES
We
use derivative instruments to manage risks related to foreign currencies,
equity prices, interest rates, and credit; to enhance investment returns; and
to facilitate portfolio diversification. Our objectives for holding derivatives
include reducing, eliminating, and efficiently managing the economic impact of
these exposures as effectively as possible. Our derivative programs include
strategies that both qualify and do not qualify for hedge accounting treatment.
All notional amounts presented below are measured in U.S. dollar equivalents.
Foreign Currency
Certain
forecasted transactions, assets, and liabilities are exposed to foreign
currency risk. We monitor our foreign currency exposures daily to maximize the
economic effectiveness of our foreign currency hedge positions. Option and
forward contracts are used to hedge a portion of forecasted international
revenue for up to three years in the future and are designated as cash flow
hedging instruments. Principal currencies hedged include the euro, Japanese
yen, British pound, and Canadian dollar. As of June 30, 2014 and
June 30, 2013, the total notional amounts of these foreign exchange
contracts sold were $4.9 billion and $5.1 billion, respectively.
Foreign currency risks related to certain non-U.S.
dollar denominated securities are hedged using foreign exchange forward
contracts that are designated as fair value hedging instruments. As of
June 30, 2014 and June 30, 2013, the total notional amounts of these
foreign exchange contracts sold were $3.1 billion and $407 million,
respectively.
Certain
options and forwards not designated as hedging instruments are also used to
manage the variability in exchange rates on accounts receivable, cash, and
intercompany positions, and to manage other foreign currency exposures. As
of June 30, 2014, the total notional amounts of these foreign exchange
contracts purchased and sold were $6.2 billion and $8.5 billion, respectively.
As of June 30, 2013, the total notional amounts of these foreign exchange
contracts purchased and sold were $5.0 billion and $7.9 billion, respectively.
Equity
Securities
held in our equity and other investments portfolio are subject to market price
risk. Market price risk is managed relative to broad-based global and
domestic equity indices using certain convertible preferred investments,
options, futures, and swap contracts not designated as hedging instruments.
From time to time, to hedge our price risk, we may use and designate equity
derivatives as hedging instruments, including puts, calls, swaps, and
forwards. As of June 30, 2014, the total notional amounts of equity
contracts purchased and sold for managing market price risk were $3.1 billion
and $2.1 billion, respectively, of which $362 million and $420 million,
respectively, were designated as hedging instruments. As of June 30, 2013,
the total notional amounts of equity contracts purchased and sold for managing
market price risk were $898 million and $1.0 billion, respectively, none of
which were designated as hedging instruments.
Interest Rate
Securities
held in our fixed-income portfolio are subject to different interest rate risks
based on their maturities. We manage the average maturity of our fixed-income
portfolio to achieve economic returns that correlate to certain broad-based
fixed-income indices using exchange-traded option and futures contracts and
over-the-counter swap and option contracts, none of which are designated as
hedging instruments. As of June 30, 2014, the total notional amounts of
fixed-interest rate contracts purchased and sold were $503 million and $741
million, respectively. As of June 30, 2013, the total notional amounts of
fixed-interest rate contracts purchased and sold were $1.1 billion and $809
million, respectively.
In
addition, we use ŇTo Be AnnouncedÓ forward purchase commitments of
mortgage-backed assets to gain exposure to agency mortgage-backed
securities. These meet the definition of a derivative instrument in cases
where physical delivery of the assets is not taken at the earliest available
delivery date. As of June 30, 2014 and 2013, the total notional derivative
amounts of mortgage contracts purchased were $1.1 billion and $1.2 billion,
respectively.
Credit
Our
fixed-income portfolio is diversified and consists primarily of investment-grade
securities. We use credit default swap contracts, not designated as hedging
instruments, to manage credit exposures relative to broad-based indices and to
facilitate portfolio diversification. We use credit default swaps as they are a
low cost method of managing exposure to individual credit risks or groups of
credit risks. As of June 30, 2014, the total notional amounts of credit
contracts purchased and sold were $412 million and $440 million, respectively.
As of June 30, 2013, the total notional amounts of credit contracts
purchased and sold were $377 million and $501 million, respectively.
Commodity
We
use broad-based commodity exposures to enhance portfolio returns and to
facilitate portfolio diversification. We use swaps, futures, and option contracts,
not designated as hedging instruments, to generate and manage exposures to
broad-based commodity indices. We use derivatives on commodities as they can be
low-cost alternatives to the purchase and storage of a variety of commodities,
including, but not limited to, precious metals, energy, and grain. As of
June 30, 2014, the total notional amounts of commodity contracts purchased
and sold were $1.4 billion and $408 million, respectively. As of June 30,
2013, the total notional amounts of commodity contracts purchased and sold were
$1.2 billion and $249 million, respectively.
Credit-Risk-Related
Contingent Features
Certain
of our counterparty agreements for derivative instruments contain provisions
that require our issued and outstanding long-term unsecured debt to maintain an
investment grade credit rating and require us to maintain minimum liquidity of
$1.0 billion. To the extent we fail to meet these requirements, we will be
required to post collateral, similar to the standard convention related to
over-the-counter derivatives. As of June 30, 2014, our long-term unsecured
debt rating was AAA, and cash investments were in excess of $1.0 billion. As a
result, no collateral was required to be posted.
Fair Values of Derivative Instruments
The following
tables present the fair values of derivative instruments designated as hedging
instruments (Ňdesignated hedge derivativesÓ) and not designated as hedging
instruments (Ňnon-designated hedge derivativesÓ). The fair values exclude the
impact of netting derivative assets and liabilities when a legally enforceable
master netting agreement exists and fair value adjustments related to our own
credit risk and counterparty credit risk:
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|
June 30, 2014 |
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June 30, 2013 |
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Assets |
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Liabilities |
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Assets |
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Liabilities |
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(In millions) |
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Short-term |
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Other |
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Equity and |
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Other |
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Short-term |
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|
Other |
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Other Current |
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||||||||||
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Non-designated Hedge Derivatives |
|
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|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
||||||||||
|
Foreign exchange contracts |
|
|
|
|
|
$ |
10 |
|
|
$ |
39 |
|
|
|
|
|
|
$ |
0 |
|
|
$ |
(97 |
) |
|
|
|
|
|
$ |
41 |
|
|
$ |
87 |
|
|
$ |
(63 |
) |
|
Equity contracts |
|
|
|
|
|
|
177 |
|
|
|
0 |
|
|
|
|
|
|
|
0 |
|
|
|
(21 |
) |
|
|
|
|
|
|
157 |
|
|
|
0 |
|
|
|
(9 |
) |
|
Interest rate contracts |
|
|
|
|
|
|
17 |
|
|
|
0 |
|
|
|
|
|
|
|
0 |
|
|
|
(12 |
) |
|
|
|
|
|
|
18 |
|
|
|
0 |
|
|
|
(45 |
) |
|
Credit contracts |
|
|
|
|
|
|
24 |
|
|
|
0 |
|
|
|
|
|
|
|
0 |
|
|
|
(13 |
) |
|
|
|
|
|
|
19 |
|
|
|
0 |
|
|
|
(17 |
) |
|
Commodity contracts |
|
|
|
|
|
|
15 |
|
|
|
0 |
|
|
|
|
|
|
|
0 |
|
|
|
(1 |
) |
|
|
|
|
|
|
3 |
|
|
|
0 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
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|
|||||||
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Total |
|
|
|
|
|
$ |
243 |
|
|
$ |
39 |
|
|
|
|
|
|
$ |
0 |
|
|
$ |
(144 |
) |
|
|
|
|
|
$ |
238 |
|
|
$ |
87 |
|
|
$ |
(135 |
) |
|
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|
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|
|||||||
|
Designated Hedge
Derivatives |
|
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|
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|
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||||||||||
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|
||||||||||
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Foreign exchange contracts |
|
|
|
|
|
$ |
1 |
|
|
$ |
70 |
|
|
|
|
|
|
$ |
0 |
|
|
$ |
(15 |
) |
|
|
|
|
|
$ |
9 |
|
|
$ |
167 |
|
|
$ |
0 |
|
|
Equity contracts |
|
|
|
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
7 |
|
|
|
(125 |
) |
|
|
|
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
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|
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|
|
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|
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Total |
|
|
|
|
|
$ |
1 |
|
|
$ |
70 |
|
|
|
|
|
|
$ |
7 |
|
|
$ |
(140 |
) |
|
|
|
|
|
$ |
9 |
|
|
$ |
167 |
|
|
$ |
0 |
|
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|
|||||||
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Total gross amounts of derivatives |
|
|
|
|
|
$ |
244 |
|
|
$ |
109 |
|
|
|
|
|
|
$ |
7 |
|
|
$ |
(284 |
) |
|
|
|
|
|
$ |
247 |
|
|
$ |
254 |
|
|
$ |
(135 |
) |
|
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|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
Gross derivatives either offset or subject to an enforceable master
netting agreement |
|
|
|
|
|
$ |
99 |
|
|
$ |
109 |
|
|
|
|
|
|
$ |
7 |
|
|
$ |
(284 |
) |
|
|
|
|
|
$ |
105 |
|
|
$ |
254 |
|
|
$ |
(97 |
) |
|
Gross amounts offset in the balance sheet |
|
|
|
|
|
|
(77 |
) |
|
|
(71 |
) |
|
|
|
|
|
|
(7 |
) |
|
|
155 |
|
|
|
|
|
|
|
(72 |
) |
|
|
(9 |
) |
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Net amounts presented in the balance sheet |
|
|
|
|
|
$ |
22 |
|
|
$ |
38 |
|
|
|
|
|
|
$ |
0 |
|
|
$ |
(129 |
) |
|
|
|
|
|
$ |
33 |
|
|
$ |
245 |
|
|
$ |
(17 |
) |
|
Gross amounts not offset in the balance sheet |
|
|
|
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Net amount |
|
|
|
|
|
$ |
22 |
|
|
$ |
38 |
|
|
|
|
|
|
$ |
0 |
|
|
$ |
(129 |
) |
|
|
|
|
|
$ |
33 |
|
|
$ |
245 |
|
|
$ |
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See also Note
4 Đ Investments and Note 6 Đ Fair Value Measurements.
Fair Value Hedge Gains (Losses)
We recognized
in other income (expense) the following gains (losses) on contracts designated
as fair value hedges and their related hedged items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Foreign Exchange Contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Derivatives |
|
$ |
(14 |
) |
|
$ |
70 |
|
|
$ |
52 |
|
|
Hedged items |
|
|
6 |
|
|
|
(69 |
) |
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total amount of ineffectiveness |
|
$ |
(8 |
) |
|
$ |
1 |
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Equity Contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Derivatives |
|
$ |
(110 |
) |
|
$ |
0 |
|
|
$ |
0 |
|
|
Hedged items |
|
|
110 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total amount of ineffectiveness |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of equity contracts excluded from effectiveness assessment |
|
$ |
(9 |
) |
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Cash Flow Hedge Gains (Losses)
We recognized the following gains (losses) on
foreign exchange contracts designated as cash flow hedges (our only cash flow
hedges during the periods presented):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Effective Portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Gains recognized in OCI, net of tax
effects of $2, $54 and $127 |
|
$ |
63 |
|
|
$ |
101 |
|
|
$ |
236 |
|
|
Gains (losses) reclassified from AOCI into
revenue |
|
$ |
104 |
|
|
$ |
195 |
|
|
$ |
(27 |
) |
|
|
|
|
|
|||||||||
|
Amount Excluded from Effectiveness
Assessment and Ineffective Portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Losses recognized in other income
(expense) |
|
$ |
(239 |
) |
|
$ |
(168 |
) |
|
$ |
(231 |
) |
|
|
|
|||||||||||
We
estimate that $32 million of net derivative gains included in AOCI at
June 30, 2014 will be reclassified into earnings within the following 12
months. No significant amounts of gains (losses) were reclassified from AOCI
into earnings as a result of forecasted transactions that failed to occur
during fiscal year 2014.
Non-Designated Derivative Gains (Losses)
Gains
(losses) from changes in fair values of derivatives that are not designated as
hedges are primarily recognized in other income (expense). These amounts are
shown in the table below, with the exception of gains (losses) on derivatives
presented in income statement line items other than other income (expense),
which were immaterial for the periods presented. Other than those derivatives
entered into for investment purposes, such as commodity contracts, the gains
(losses) below are generally economically offset by unrealized gains (losses)
in the underlying available-for-sale securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Foreign exchange contracts |
|
$ |
(78 |
) |
|
$ |
18 |
|
|
$ |
(119 |
) |
|
Equity contracts |
|
|
(64 |
) |
|
|
16 |
|
|
|
(85 |
) |
|
Interest-rate contracts |
|
|
24 |
|
|
|
(11 |
) |
|
|
93 |
|
|
Credit contracts |
|
|
13 |
|
|
|
(3 |
) |
|
|
(7 |
) |
|
Commodity contracts |
|
|
71 |
|
|
|
(42 |
) |
|
|
(121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
(34 |
) |
|
$ |
(22 |
) |
|
$ |
(239 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 Ń FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a
Recurring Basis
The following tables present the fair value of our
financial instruments that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions) |
|
|
Level 1 |
|
|
|
Level 2 |
|
|
|
Level 3 |
|
|
|
Gross Fair Value |
|
|
|
Netting |
(a) |
|
|
Net Fair |
|
|
|
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
June 30, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Mutual funds |
|
$ |
590 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
590 |
|
|
$ |
0 |
|
|
$ |
590 |
|
|
Commercial paper |
|
|
0 |
|
|
|
189 |
|
|
|
0 |
|
|
|
189 |
|
|
|
0 |
|
|
|
189 |
|
|
Certificates of deposit |
|
|
0 |
|
|
|
1,197 |
|
|
|
0 |
|
|
|
1,197 |
|
|
|
0 |
|
|
|
1,197 |
|
|
U.S. government and agency securities |
|
|
66,288 |
|
|
|
745 |
|
|
|
0 |
|
|
|
67,033 |
|
|
|
0 |
|
|
|
67,033 |
|
|
Foreign government bonds |
|
|
139 |
|
|
|
3,210 |
|
|
|
0 |
|
|
|
3,349 |
|
|
|
0 |
|
|
|
3,349 |
|
|
Mortgage-backed securities |
|
|
0 |
|
|
|
1,015 |
|
|
|
0 |
|
|
|
1,015 |
|
|
|
0 |
|
|
|
1,015 |
|
|
Corporate notes and bonds |
|
|
0 |
|
|
|
6,863 |
|
|
|
0 |
|
|
|
6,863 |
|
|
|
0 |
|
|
|
6,863 |
|
|
Municipal securities |
|
|
0 |
|
|
|
332 |
|
|
|
0 |
|
|
|
332 |
|
|
|
0 |
|
|
|
332 |
|
|
Common and preferred stock |
|
|
9,552 |
|
|
|
1,825 |
|
|
|
14 |
|
|
|
11,391 |
|
|
|
0 |
|
|
|
11,391 |
|
|
Derivatives |
|
|
5 |
|
|
|
348 |
|
|
|
7 |
|
|
|
360 |
|
|
|
(155 |
) |
|
|
205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
76,574 |
|
|
$ |
15,724 |
|
|
$ |
21 |
|
|
$ |
92,319 |
|
|
$ |
(155 |
) |
|
$ |
92,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Derivatives and other |
|
$ |
5 |
|
|
$ |
153 |
|
|
$ |
126 |
|
|
$ |
284 |
|
|
$ |
(155 |
) |
|
$ |
129 |
|
|
|
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
(In
millions) |
|
|
Level 1 |
|
|
|
Level 2 |
|
|
|
Level 3 |
|
|
|
Gross Fair Value |
|
|
|
Netting |
(a) |
|
|
Net Fair |
|
|
|
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
June 30, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Mutual funds |
|
$ |
868 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
868 |
|
|
$ |
0 |
|
|
$ |
868 |
|
|
Commercial paper |
|
|
0 |
|
|
|
603 |
|
|
|
0 |
|
|
|
603 |
|
|
|
0 |
|
|
|
603 |
|
|
Certificates of deposit |
|
|
0 |
|
|
|
994 |
|
|
|
0 |
|
|
|
994 |
|
|
|
0 |
|
|
|
994 |
|
|
U.S. government and agency securities |
|
|
62,237 |
|
|
|
2,664 |
|
|
|
0 |
|
|
|
64,901 |
|
|
|
0 |
|
|
|
64,901 |
|
|
Foreign government bonds |
|
|
9 |
|
|
|
851 |
|
|
|
0 |
|
|
|
860 |
|
|
|
0 |
|
|
|
860 |
|
|
Mortgage-backed securities |
|
|
0 |
|
|
|
1,311 |
|
|
|
0 |
|
|
|
1,311 |
|
|
|
0 |
|
|
|
1,311 |
|
|
Corporate notes and bonds |
|
|
0 |
|
|
|
4,915 |
|
|
|
19 |
|
|
|
4,934 |
|
|
|
0 |
|
|
|
4,934 |
|
|
Municipal securities |
|
|
0 |
|
|
|
385 |
|
|
|
0 |
|
|
|
385 |
|
|
|
0 |
|
|
|
385 |
|
|
Common and preferred stock |
|
|
8,470 |
|
|
|
717 |
|
|
|
5 |
|
|
|
9,192 |
|
|
|
0 |
|
|
|
9,192 |
|
|
Derivatives |
|
|
12 |
|
|
|
489 |
|
|
|
0 |
|
|
|
501 |
|
|
|
(81 |
) |
|
|
420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
71,596 |
|
|
$ |
12,929 |
|
|
$ |
24 |
|
|
$ |
84,549 |
|
|
$ |
(81 |
) |
|
$ |
84,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Derivatives and other |
|
$ |
14 |
|
|
$ |
121 |
|
|
$ |
0 |
|
|
$ |
135 |
|
|
$ |
(80 |
) |
|
$ |
55 |
|
|
|
|
|||||||||||||||||||||||
(a) These
amounts represent the impact of netting derivative assets and derivative
liabilities when a legally enforceable master netting agreement exists and fair
value adjustments related to our own credit risk and counterparty credit risk.
In connection with the transaction
to acquire substantially all of Nokia CorporationŐs (ŇNokiaÓ) Devices and
Services Business (ŇNDSÓ), on September 23, 2013 we provided Nokia Ű1.5 billion
($2.1 billion) principal of convertible notes classified as Level 3 financial
instruments. Upon closing of the acquisition, Nokia repurchased these notes at
their principal amount plus accrued interest. All other changes in our Level 3
financial instruments that are measured at fair value on a recurring basis were
immaterial during the periods presented.
The following table reconciles the total Net Fair
Value of assets above to the balance sheet presentation of these same assets in
Note 4 Đ Investments.
|
|
|
|
|
|
|
|
|
|
|||
|
(In millions) |
|
||||||||||
|
|
|
||||||||||
|
|
|
|
|||||||||
|
June 30, |
|
2014 |
|
|
2013 |
|
|||||
|
|
|
|
|||||||||
|
Net fair value of assets measured at fair
value on a recurring basis |
|
$ |
92,164 |
|
|
$ |
84,468 |
|
|||
|
Cash |
|
|
4,980 |
|
|
|
1,967 |
|
|||
|
Common and preferred stock measured at
fair value on a nonrecurring basis |
|
|
520 |
|
|
|
395 |
|
|||
|
Other investments measured at fair value
on a nonrecurring basis |
|
|
1,150 |
|
|
|
1,256 |
|
|||
|
Less derivative net assets classified as
other current assets |
|
|
(38 |
) |
|
|
(213 |
) |
|||
|
Other |
|
|
(6 |
) |
|
|
(7 |
) |
|||
|
|
|
|
|
|
|
||||||
|
Recorded basis of investment
components (a) |
|
$ |
98,770 |
|
|
$ |
87,866 |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
(a) Excludes
held-to-maturity investments recorded at amortized cost and measured at fair
value on a nonrecurring basis.
Financial Assets and Liabilities Measured at
Fair Value on a Nonrecurring Basis
During
fiscal year 2014 and 2013, we did not record any material other-than-temporary
impairments on financial assets required to be measured at fair value on a
nonrecurring basis.
NOTE 7 Ń INVENTORIES
The components of inventories were as follows:
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|||||||
|
|
|
|||||||
|
|
|
|
||||||
|
June 30, |
|
2014 |
|
|
2013 |
|
||
|
|
|
|
||||||
|
Raw materials |
|
$ |
944 |
|
|
$ |
328 |
|
|
Work in process |
|
|
266 |
|
|
|
201 |
|
|
Finished goods |
|
|
1,450 |
|
|
|
1,409 |
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
2,660 |
|
|
$ |
1,938 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 8 Ń PROPERTY AND EQUIPMENT
The components of property and equipment were as
follows:
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|||||||
|
|
|
|||||||
|
|
|
|
||||||
|
June 30, |
|
2014 |
|
|
2013 |
|
||
|
|
|
|
||||||
|
Land |
|
$ |
541 |
|
|
$ |
525 |
|
|
Buildings and improvements |
|
|
8,867 |
|
|
|
7,326 |
|
|
Leasehold improvements |
|
|
3,560 |
|
|
|
2,946 |
|
|
Computer equipment and software |
|
|
11,430 |
|
|
|
9,242 |
|
|
Furniture and equipment |
|
|
3,406 |
|
|
|
2,465 |
|
|
|
|
|
|
|
|
|||
|
Total, at cost |
|
|
27,804 |
|
|
|
22,504 |
|
|
Accumulated depreciation |
|
|
(14,793 |
) |
|
|
(12,513 |
) |
|
|
|
|
|
|
|
|||
|
Total, net |
|
$ |
13,011 |
|
|
$ |
9,991 |
|
|
|
|
|
|
|
|
|
|
|
During
fiscal years 2014, 2013, and 2012, depreciation expense was $3.4 billion, $2.6
billion, and $2.2 billion, respectively.
stateme
NOTE 9 Ń BUSINESS COMBINATIONS
NokiaŐs Devices and Services Business
On
April 25, 2014, we completed the transaction to acquire substantially all
of NDS for a total purchase price of $9.5 billion, including cash acquired of
$1.5 billion (Ňthe AcquisitionÓ). The purchase price consisted primarily of
cash of $7.1 billion and NokiaŐs repurchase of convertible notes of $2.1
billion which was a non-cash transaction. The Acquisition is expected to
accelerate the growth of our Devices and Consumer (ŇD&CÓ) business through
faster innovation, synergies, and unified branding and marketing.
The
purchase price allocation as of the date of the Acquisition was based on a
preliminary valuation and is subject to revision as more detailed analyses are
completed and additional information about the fair value of assets acquired
and liabilities assumed become available.
The major classes of assets and liabilities to
which we have preliminarily allocated the purchase price were as follows:
|
|
|
|
|
|
|
(In millions) |
|
|||
|
|
|
|||
|
|
|
|||
|
Cash |
|
$ |
1,503 |
|
|
Accounts receivable (a) |
|
|
754 |
|
|
Inventories |
|
|
544 |
|
|
Other current assets |
|
|
960 |
|
|
Property and equipment |
|
|
981 |
|
|
Intangible assets |
|
|
4,509 |
|
|
Goodwill (b) |
|
|
5,458 |
|
|
Other |
|
|
249 |
|
|
Current liabilities |
|
|
(4,576 |
) |
|
Long-term liabilities |
|
|
(917 |
) |
|
|
|
|||
|
Total purchase price |
|
$ |
9,465 |
|
|
|
|
|
|
|
(a) Gross
accounts receivable is $901 million, of which $147 million is expected to be
uncollectible.
(b) Goodwill
was assigned to our new Phone Hardware segment. The goodwill was primarily
attributed to increased synergies that are expected to be achieved from the
integration of NDS. Goodwill of $4.5 billion is expected to be deductible in
Finland for tax purposes.
Following are the details of the purchase price
allocated to the intangible assets acquired:
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Amount |
|
|
Weighted Average Life |
|
||
|
|
|
|||||||
|
|
|
|
||||||
|
Technology-based |
|
$ |
2,493 |
|
|
|
9 years |
|
|
Contract-based |
|
|
1,500 |
|
|
|
9 years |
|
|
Customer-related |
|
|
359 |
|
|
|
3 years |
|
|
Marketing-related (trade names) |
|
|
157 |
|
|
|
2 years |
|
|
|
|
|
|
|
|
|||
|
Fair value of intangible assets acquired |
|
$ |
4,509 |
|
|
|
8 years |
|
|
|
|
|
|
|
|
|
|
|
Our consolidated income statement
for fiscal year 2014 includes revenue and operating loss of $2.0 billion and $692
million, respectively, attributable to NDS since the Acquisition.
Following
are the supplemental consolidated results of Microsoft Corporation on an
unaudited pro forma basis, as if the Acquisition had been consummated on
July 1, 2012:
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts) |
|
|
|
|
|
|
||
|
|
|
|||||||
|
|
|
|
||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
||
|
|
|
|
||||||
|
Revenue |
|
$ |
96,248 |
|
|
$ |
93,243 |
|
|
Net income |
|
$ |
20,234 |
|
|
$ |
20,153 |
|
|
Diluted earnings per share |
|
$ |
2.41 |
|
|
$ |
2.38 |
|
|
|
|
|
|
|
|
|||
These
pro forma results were based on estimates and assumptions, which we believe are
reasonable. They are not the results that would have been realized had we been
a combined company during the periods presented and are not necessarily
indicative of our consolidated results of operations in future periods. The pro
forma results include adjustments primarily related to purchase accounting
adjustments and the elimination of related party transactions between Microsoft
and NDS. Acquisition costs and other non-recurring charges incurred are
included in the earliest period presented.
During
the fourth quarter of fiscal year 2014, we incurred $21 million of acquisition
costs associated with the purchase of NDS. Acquisition costs are primarily
comprised of transaction fees and direct acquisition costs, including legal,
finance, consulting, and other professional fees. These costs are included in
Integration and restructuring costs on our consolidated income statement for
fiscal year 2014.
Certain
concurrent transactions were recognized separately from the Acquisition. Prior
to the Acquisition, we had joint strategic initiatives with Nokia; this
contractual relationship was terminated in conjunction with the Acquisition. No
gain or loss was recorded upon termination of this agreement, as it was
determined to be at market value. In addition, we agreed to license NokiaŐs
mapping services and will pay Nokia separately for the services provided under
a four-year license as they are rendered.
Yammer
On
July 18, 2012, we acquired Yammer, Inc. (ŇYammerÓ), a leading provider of
enterprise social networks, for $1.1 billion in cash. Yammer will continue to
develop its standalone service and will add an enterprise social networking
service to MicrosoftŐs portfolio of complementary cloud-based services. The
major classes of assets to which we allocated the purchase price were goodwill
of $937 million and identifiable intangible assets of $178 million. We assigned
the goodwill to Commercial Other under our current segment structure. Yammer
was consolidated into our results of operations starting on the acquisition
date.
Skype
On
October 13, 2011, we acquired Skype Global S.‡ r.l. (ŇSkypeÓ), a leading
global provider of software applications and related Internet communications products
based in Luxembourg, for $8.6 billion, primarily in cash. The major classes of
assets and liabilities to which we allocated the purchase price were goodwill
of $7.1 billion, identifiable intangible assets of $1.6 billion, and unearned
revenue of $222 million. The goodwill recognized in connection with the
acquisition is primarily attributable to our expectation of extending SkypeŐs
brand and the reach of its networked platform, while enhancing MicrosoftŐs
existing portfolio of real-time communications products and services. We
assigned the goodwill to the following segments under our current segment
structure: $5.6 billion to Commercial Licensing, $1.4 billion to Computing and
Gaming Hardware, and $54 million to D&C Other. Skype was consolidated into
our results of operations starting on the acquisition date.
Following are the details
of the purchase price allocated to the intangible assets acquired:
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
Weighted |
|
||
|
|
|
|||||||
|
|
|
|
||||||
|
Marketing-related (trade names) |
|
$ |
1,249 |
|
|
|
15 years |
|
|
Technology-based |
|
|
275 |
|
|
|
5 years |
|
|
Customer-related |
|
|
114 |
|
|
|
5 years |
|
|
Contract-based |
|
|
10 |
|
|
|
4 years |
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
1,648 |
|
|
|
13 years |
|
|
|
|
|
|
|
|
|
|
|
Other
During
fiscal year 2014, we completed five additional acquisitions for total
consideration of $140 million, all of which was paid in cash. These entities
have been included in our consolidated results of operations since their
respective acquisition dates.
With
the exception of NDS, pro forma results of operations have not been presented
because the effects of the business combinations described in this note,
individually and in aggregate, were not material to our consolidated results of
operations.
NOTE 10 Ń GOODWILL
Changes in the carrying amount of goodwill were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
June 30, 2012 |
|
|
Acquisitions |
|
|
Other |
|
|
June 30, 2013 |
|
|
Acquisitions |
|
|
Other |
|
|
June 30, |
|
|||||||
|
|
|
|||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Devices and Consumer |
|
Licensing |
|
$ |
866 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
866 |
|
|
$ |
0 |
|
|
$ |
2 |
|
|
$ |
868 |
|
|
|
|
Hardware: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computing and Gaming
Hardware |
|
|
1,641 |
|
|
|
75 |
|
|
|
(27 |
) |
|
|
1,689 |
|
|
|
0 |
|
|
|
9 |
|
|
|
1,698 |
|
|
|
|
Phone Hardware |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
5,458 |
(a) |
|
|
(104 |
) |
|
|
5,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Total D&C Hardware |
|
|
1,641 |
|
|
|
75 |
|
|
|
(27 |
) |
|
|
1,689 |
|
|
|
5,458 |
|
|
|
(95 |
) |
|
|
7,052 |
|
|
|
|
Other |
|
|
742 |
|
|
|
0 |
|
|
|
(4 |
) |
|
|
738 |
|
|
|
0 |
|
|
|
0 |
|
|
|
738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Total Devices and
Consumer |
|
|
3,249 |
|
|
|
75 |
|
|
|
(31 |
) |
|
|
3,293 |
|
|
|
5,458 |
|
|
|
(93 |
) |
|
|
8,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
Licensing |
|
|
10,054 |
|
|
|
4 |
|
|
|
(7 |
) |
|
|
10,051 |
|
|
|
2 |
|
|
|
5 |
|
|
|
10,058 |
|
|
|
|
Other |
|
|
149 |
|
|
|
1,164 |
|
|
|
(2 |
) |
|
|
1,311 |
|
|
|
105 |
|
|
|
(5 |
) |
|
|
1,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Total Commercial |
|
|
10,203 |
|
|
|
1,168 |
|
|
|
(9 |
) |
|
|
11,362 |
|
|
|
107 |
|
|
|
0 |
|
|
|
11,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total goodwill |
|
|
|
$ |
13,452 |
|
|
$ |
1,243 |
|
|
$ |
(40 |
) |
|
$ |
14,655 |
|
|
$ |
5,565 |
|
|
$ |
(93 |
) |
|
$ |
20,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Goodwill acquired
during fiscal year 2014 related to the acquisition of NDS. See Note 9 Đ Business Combinations for additional
details.
The
measurement periods for the valuation of assets acquired and liabilities
assumed end as soon as information on the facts and circumstances that existed
as of the acquisition dates becomes available, but do not exceed 12 months.
Adjustments in purchase price allocations may require a recasting of the
amounts allocated to goodwill retroactive to the periods in which the acquisitions
occurred.
Any
change in the goodwill amounts resulting from foreign currency translations are
presented as ŇOtherÓ in the above table. Also included in ŇOtherÓ are business
dispositions and transfers between business segments due to reorganizations, as
applicable.
As
discussed in Note 21 Đ Segment Information and Geographic Data, during the
first quarter of fiscal year 2014, we changed our organizational structure as
part of our transformation to a devices and services company. This resulted in
a change in our operating segments and reporting units. We allocated goodwill
to our new reporting units using a relative fair value approach. In addition,
we completed an assessment of any potential goodwill impairment for all
reporting units immediately prior to the reallocation and determined that no
impairment existed.
Goodwill Impairment
We
test goodwill for impairment annually on May 1 at the reporting unit level
using a discounted cash flow methodology with a peer-based, risk-adjusted
weighted average cost of capital. We believe use of a discounted cash flow
approach is the most reliable indicator of the fair values of the businesses.
No
impairment of goodwill was identified as of May 1, 2014 or May 1,
2013. Upon completion of the fiscal year 2012 test, the goodwill of our OSD
unit (in Devices and Consumer Other under our current segment structure) was
determined to be impaired. The impairment was the result of the OSD unit
experiencing slower than projected growth in search queries and search advertising
revenue per query, slower growth in display revenue, and changes in the timing
and implementation of certain initiatives designed to drive search and display
revenue growth in the future. This goodwill impairment charge of $6.2 billion
also represented our accumulated goodwill impairment as of June 30, 2014
and 2013.
NOTE 11 Ń INTANGIBLE ASSETS
The components
of intangible assets, all of which are finite-lived, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Gross |
|
|
Accumulated |
|
|
Net Carrying |
|
|
Gross |
|
|
Accumulated |
|
|
Net Carrying |
|
||||||
|
|
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Year Ended June 30, |
|
|
|
|
|
|
|
2014 |
|
|
|
|
|
|
|
|
2013 |
|
||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Technology-based (a) |
|
$ |
6,440 |
|
|
$ |
(2,615 |
) |
|
$ |
3,825 |
|
|
$ |
3,760 |
|
|
$ |
(2,110 |
) |
|
$ |
1,650 |
|
|
Marketing-related |
|
|
1,518 |
|
|
|
(324 |
) |
|
|
1,194 |
|
|
|
1,348 |
|
|
|
(211 |
) |
|
|
1,137 |
|
|
Contract-based |
|
|
2,266 |
|
|
|
(716 |
) |
|
|
1,550 |
|
|
|
823 |
|
|
|
(688 |
) |
|
|
135 |
|
|
Customer-related |
|
|
732 |
|
|
|
(320 |
) |
|
|
412 |
|
|
|
380 |
|
|
|
(219 |
) |
|
|
161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
10,956 |
|
|
$ |
(3,975 |
) |
|
$ |
6,981 |
|
|
$ |
6,311 |
|
|
$ |
(3,228 |
) |
|
$ |
3,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Technology-based
intangible assets included $98 million and $218 million as of June 30,
2014 and 2013, respectively, of net carrying amount of software to be sold,
leased, or otherwise marketed.
We
estimate that we have no significant residual value related to our intangible
assets. No material impairments of intangible assets were identified during any
of the periods presented.
The components of intangible assets acquired during
the periods presented were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Amount |
|
|
Weighted Average Life |
|
|
Amount |
|
|
Weighted Average Life |
|
||||
|
|
|
|||||||||||||||
|
|
|
|
|
|
||||||||||||
|
Year Ended June 30, |
|
2014 |
|
|
|
|
|
2013 |
|
|
|
|
||||
|
|
|
|
|
|
||||||||||||
|
Technology-based |
|
$ |
2,841 |
|
|
|
9 years |
|
|
$ |
539 |
|
|
|
4 years |
|
|
Marketing-related |
|
|
174 |
|
|
|
2 years |
|
|
|
39 |
|
|
|
7 years |
|
|
Contract-based |
|
|
1,500 |
|
|
|
9 years |
|
|
|
0 |
|
|
|
* |
|
|
Customer-related |
|
|
363 |
|
|
|
3 years |
|
|
|
89 |
|
|
|
6 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
4,878 |
|
|
|
8 years |
|
|
$ |
667 |
|
|
|
5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Not applicable
The
table above includes $4.5 billion related to the acquisition of NDS during
fiscal year 2014. See Note 9 Đ Business Combination for additional details.
Intangible
assets amortization expense was $845 million, $739 million, and $558 million
for fiscal years 2014, 2013, and 2012, respectively. Amortization of
capitalized software was $200 million, $210 million, and $117 million for
fiscal years 2014, 2013, and 2012, respectively.
The following table
outlines the estimated future amortization expense related to intangible assets
held at June 30, 2014:
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|||
|
|
|
|||
|
Year Ending June 30, |
|
|
|
|
|
|
|
|||
|
2015 |
|
$ |
1,237 |
|
|
2016 |
|
|
1,075 |
|
|
2017 |
|
|
804 |
|
|
2018 |
|
|
661 |
|
|
2019 |
|
|
637 |
|
|
Thereafter |
|
|
2,567 |
|
|
|
|
|||
|
Total |
|
$ |
6,981 |
|
|
|
|
|
|
|
NOTE 12 Ń DEBT
As of June 30,
2014, we had $22.6 billion of issued and outstanding debt, comprising $2.0
billion of short-term debt and $20.6 billion of long-term debt. As of June 30,
2013, we had $15.6 billion of issued and outstanding long-term debt.
Short-term Debt
As of June 30,
2014, we had $2.0 billion of commercial paper issued and outstanding, with a
weighted-average interest rate of 0.12% and maturities ranging from 86 days to
91 days. The estimated fair value of this commercial paper approximates its
carrying value.
We
have a $5.0 billion credit facility that expires on November 14, 2018,
which serves as a back-up for our commercial paper program. As of June 30,
2014, we were in compliance with the only financial covenant in the credit
agreement, which requires us to maintain a coverage ratio of at least three
times earnings before interest, taxes, depreciation, and amortization to
interest expense, as defined in the credit agreement. No amounts were drawn
against the credit facility during any of the periods presented.
Long-term Debt
As of June 30,
2014, the total carrying value and estimated fair value of our long-term debt were
$20.6 billion and $21.5 billion, respectively. This is compared to a carrying
value and estimated fair value of our long-term debt, including the current
portion, of $15.6 billion and $15.8 billion, respectively, as of June 30,
2013. These estimated fair values are based on Level 2 inputs.
The components of our long-term debt and the
associated interest rates were as follows as of June 30, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due Date |
|
Face Value June 30, 2014 |
|
|
Face Value June 30, |
|
|
Stated Rate |
|
|
Effective Rate |
|
||||
|
|
|
|||||||||||||||
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
||||||||||||
|
Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
September 27, 2013 |
|
$ |
* |
|
|
$ |
1,000 |
|
|
|
0.875% |
|
|
|
1.000% |
|
|
June 1, 2014 |
|
|
* |
|
|
|
2,000 |
|
|
|
2.950% |
|
|
|
3.049% |
|
|
September 25, 2015 |
|
|
1,750 |
|
|
|
1,750 |
|
|
|
1.625% |
|
|
|
1.795% |
|
|
February 8, 2016 |
|
|
750 |
|
|
|
750 |
|
|
|
2.500% |
|
|
|
2.642% |
|
|
November 15, 2017 |
|
|
600 |
|
|
|
600 |
|
|
|
0.875% |
|
|
|
1.084% |
|
|
May 1, 2018 |
|
|
450 |
|
|
|
450 |
|
|
|
1.000% |
|
|
|
1.106% |
|
|
December 6, 2018 (a) |
|
|
1,250 |
|
|
|
* |
|
|
|
1.625% |
|
|
|
1.824% |
|
|
June 1, 2019 |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
4.200% |
|
|
|
4.379% |
|
|
October 1, 2020 |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
3.000% |
|
|
|
3.137% |
|
|
February 8, 2021 |
|
|
500 |
|
|
|
500 |
|
|
|
4.000% |
|
|
|
4.082% |
|
|
December 6, 2021 (b) |
|
|
2,396 |
|
|
|
* |
|
|
|
2.125% |
|
|
|
2.233% |
|
|
November 15, 2022 |
|
|
750 |
|
|
|
750 |
|
|
|
2.125% |
|
|
|
2.239% |
|
|
May 1, 2023 |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
2.375% |
|
|
|
2.465% |
|
|
December 15, 2023 (a) |
|
|
1,500 |
|
|
|
* |
|
|
|
3.625% |
|
|
|
3.726% |
|
|
December 6, 2028 (b) |
|
|
2,396 |
|
|
|
* |
|
|
|
3.125% |
|
|
|
3.218% |
|
|
May 2, 2033 (c) |
|
|
753 |
|
|
|
715 |
|
|
|
2.625% |
|
|
|
2.690% |
|
|
June 1, 2039 |
|
|
750 |
|
|
|
750 |
|
|
|
5.200% |
|
|
|
5.240% |
|
|
October 1, 2040 |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
4.500% |
|
|
|
4.567% |
|
|
February 8, 2041 |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
5.300% |
|
|
|
5.361% |
|
|
November 15, 2042 |
|
|
900 |
|
|
|
900 |
|
|
|
3.500% |
|
|
|
3.571% |
|
|
May 1, 2043 |
|
|
500 |
|
|
|
500 |
|
|
|
3.750% |
|
|
|
3.829% |
|
|
December 15, 2043 (a) |
|
|
500 |
|
|
|
* |
|
|
|
4.875% |
|
|
|
4.918% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
20,745 |
|
|
$ |
15,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) In
December 2013, we issued $3.3 billion of debt securities.
(b) In
December 2013, we issued Ű3.5 billion of debt securities.
(c) In
April 2013, we issued Ű550 million of debt securities.
* Not
applicable.
The
notes in this table are senior unsecured obligations and rank equally with our
other senior unsecured debt outstanding. Interest on these notes is paid
semi-annually, except for the euro-denominated debt securities on which
interest is paid annually. Cash paid for interest on our debt for fiscal years
2014, 2013, and 2012 was $509 million, $371 million, and $344 million,
respectively. As of June 30, 2014 and 2013, the aggregate unamortized
discount for our long-term debt, including the current portion, was $100 million
and $65 million, respectively.
Debt Service
Maturities of
our long-term debt for each of the next five years and thereafter are as
follows:
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|||
|
|
|
|||
|
Year Ending June 30, |
|
|
|
|
|
|
|
|||
|
2015 |
|
$ |
0 |
|
|
2016 |
|
|
2,500 |
|
|
2017 |
|
|
0 |
|
|
2018 |
|
|
1,050 |
|
|
2019 |
|
|
2,250 |
|
|
Thereafter |
|
|
14,945 |
|
|
|
|
|||
|
Total |
|
$ |
20,745 |
|
|
|
|
|
|
|
NOTE 13 Ń INCOME TAXES
The components of the provision for income taxes
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|||||||||||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Current Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
U.S. federal |
|
$ |
3,738 |
|
|
$ |
3,131 |
|
|
$ |
2,235 |
|
|
U.S. state and local |
|
|
266 |
|
|
|
332 |
|
|
|
153 |
|
|
Foreign |
|
|
2,073 |
|
|
|
1,745 |
|
|
|
1,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Current taxes |
|
|
6,077 |
|
|
|
5,208 |
|
|
|
4,335 |
|
|
|
|
|
|
|||||||||
|
Deferred Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Deferred taxes |
|
|
(331 |
) |
|
|
(19 |
) |
|
|
954 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Provision for income taxes |
|
$ |
5,746 |
|
|
$ |
5,189 |
|
|
$ |
5,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and foreign components
of income before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|||||||||||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
U.S. |
|
$ |
7,127 |
|
|
$ |
6,674 |
|
|
$ |
1,600 |
|
|
Foreign |
|
|
20,693 |
|
|
|
20,378 |
|
|
|
20,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Income before income taxes |
|
$ |
27,820 |
|
|
$ |
27,052 |
|
|
$ |
22,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The items
accounting for the difference between income taxes computed at the U.S. federal
statutory rate and our effective rate were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Federal statutory rate |
|
|
35.0% |
|
|
|
35.0% |
|
|
|
35.0% |
|
|
Effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign earnings taxed at lower rates |
|
|
(17.1)% |
|
|
|
(17.5)% |
|
|
|
(21.1)% |
|
|
Goodwill impairment |
|
|
0% |
|
|
|
0% |
|
|
|
9.7% |
|
|
Other reconciling items, net |
|
|
2.8% |
|
|
|
1.7% |
|
|
|
0.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Effective rate |
|
|
20.7% |
|
|
|
19.2% |
|
|
|
23.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reduction
from the federal statutory rate from foreign earnings taxed at lower rates
results from producing and distributing our products and services through our
foreign regional operations centers in Ireland, Singapore, and Puerto Rico. Our
foreign earnings, which are taxed at rates lower than the U.S. rate and are
generated from our regional operating centers, were 81%, 79%, and 79% of our foreign
income before tax in fiscal years 2014, 2013, and 2012, respectively. In
general, other reconciling items consist of interest, adjustments for
intercompany transfer pricing, U.S. state income taxes, domestic production
deductions, and credits. In fiscal years 2014, 2013, and 2012, there were no
individually significant other reconciling items.
The components of the
deferred income tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
||
|
|
|
|||||||
|
|
|
|
||||||
|
June 30, |
|
2014 |
|
|
2013 |
|
||
|
|
|
|
||||||
|
Deferred Income Tax Assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Stock-based compensation expense |
|
$ |
903 |
|
|
$ |
888 |
|
|
Other expense items |
|
|
1,112 |
|
|
|
917 |
|
|
Unearned revenue |
|
|
520 |
|
|
|
445 |
|
|
Impaired investments |
|
|
209 |
|
|
|
246 |
|
|
Loss carryforwards |
|
|
922 |
|
|
|
715 |
|
|
Other revenue items |
|
|
64 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|||
|
Deferred income tax assets |
|
$ |
3,730 |
|
|
$ |
3,266 |
|
|
Less valuation allowance |
|
|
(903 |
) |
|
|
(579 |
) |
|
|
|
|
|
|
|
|||
|
Deferred income tax assets, net of
valuation allowance |
|
$ |
2,827 |
|
|
$ |
2,687 |
|
|
|
|
|
|
|
|
|||
|
|
|
|
||||||
|
Deferred Income Tax Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Foreign earnings |
|
$ |
(1,140 |
) |
|
$ |
(1,146 |
) |
|
Unrealized gain on investments |
|
|
(1,911 |
) |
|
|
(1,012 |
) |
|
Depreciation and amortization |
|
|
(470 |
) |
|
|
(604 |
) |
|
Other |
|
|
(87 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|||
|
Deferred income tax liabilities |
|
$ |
(3,608 |
) |
|
$ |
(2,764 |
) |
|
|
|
|
|
|
|
|||
|
Net deferred income tax assets (liabilities) |
|
$ |
(781 |
) |
|
$ |
(77 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Reported As |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Current deferred income tax assets |
|
$ |
1,941 |
|
|
$ |
1,632 |
|
|
Other current liabilities |
|
|
(125) |
|
|
|
0 |
|
|
Other long-term assets |
|
|
131 |
|
|
|
0 |
|
|
Long-term deferred income tax liabilities |
|
|
(2,728 |
) |
|
|
(1,709 |
) |
|
|
|
|
|
|
|
|||
|
Net deferred income tax assets (liabilities) |
|
$ |
(781 |
) |
|
$ |
(77 |
) |
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2014, we had net operating loss carryforwards of $3.6 billion,
including $2.2 billion of foreign net operating loss carryforwards acquired
through our acquisition of Skype, and $545 million through our acquisition of NDS.
The valuation allowance disclosed in the table above relates to the foreign net
operating loss carryforwards and other net deferred tax assets that may not be
realized.
Deferred
income tax balances reflect the effects of temporary differences between the
carrying amounts of assets and liabilities and their tax bases and are stated
at enacted tax rates expected to be in effect when the taxes are actually paid
or recovered.
As
of June 30, 2014, we have not provided deferred U.S. income taxes or
foreign withholding taxes on temporary differences of approximately $92.9
billion resulting from earnings for certain non-U.S. subsidiaries which are
permanently reinvested outside the U.S. The unrecognized deferred tax liability
associated with these temporary differences was approximately $29.6 billion at
June 30, 2014.
Income
taxes paid were $5.5 billion, $3.9 billion, and $3.5 billion in fiscal years
2014, 2013, and 2012, respectively.
Uncertain Tax Positions
Unrecognized tax benefits
as of June 30, 2014, 2013, and 2012, were $8.7 billion, $8.6 billion, and
$7.2 billion, respectively. If
recognized, these tax benefits would affect our effective tax rates for fiscal
years 2014, 2013, and 2012, by $7.0 billion, $6.5 billion, and $6.2 billion,
respectively.
As
of June 30, 2014, 2013, and 2012, we had accrued interest expense related
to uncertain tax positions of $1.5 billion, $1.3 billion, and $939 million, respectively,
net of federal income tax benefits. Interest expense on unrecognized tax
benefits was $235 million, $400 million, and $154 million in fiscal years 2014,
2013, and 2012, respectively.
The aggregate changes in
the balance of unrecognized tax benefits were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Balance, beginning of year |
|
$ |
8,648 |
|
|
$ |
7,202 |
|
|
$ |
6,935 |
|
|
Decreases related to settlements |
|
|
(583 |
) |
|
|
(30 |
) |
|
|
(16 |
) |
|
Increases for tax positions related to the
current year |
|
|
566 |
|
|
|
612 |
|
|
|
481 |
|
|
Increases for tax positions related to
prior years |
|
|
217 |
|
|
|
931 |
|
|
|
118 |
|
|
Decreases for tax positions related to
prior years |
|
|
(95 |
) |
|
|
(65 |
) |
|
|
(292 |
) |
|
Decreases due to lapsed statutes of
limitations |
|
|
(39 |
) |
|
|
(2 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance, end of year |
|
$ |
8,714 |
|
|
$ |
8,648 |
|
|
$ |
7,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the third quarter of fiscal year 2011, we reached a settlement of a portion of
an I.R.S. audit of tax years 2004 to 2006, which reduced our income tax expense
by $461 million. While we settled a portion of the I.R.S. audit, we remain
under audit for these years. In February 2012, the I.R.S. withdrew its 2011
Revenue Agents Report and reopened the audit phase of the examination. As of
June 30, 2014, the primary unresolved issue relates to transfer pricing,
which could have a significant impact on our consolidated financial statements
if not resolved favorably. We believe our allowances for income tax
contingencies are adequate. We have not received a proposed assessment for the
unresolved issues and do not expect a final resolution of these issues in the
next 12 months. Based on the information currently available, we do not
anticipate a significant increase or decrease to our tax contingencies for
these issues within the next 12 months. We also continue to be subject to
examination by the I.R.S. for tax years 2007 to 2013.
We
are subject to income tax in many jurisdictions outside the U.S. Our operations
in certain jurisdictions remain subject to examination for tax years 1996 to
2013, some of which are currently under audit by local tax authorities. The
resolutions of these audits are not expected to be material to our consolidated
financial statements.
NOTE 14 Ń UNEARNED REVENUE
Unearned revenue by segment was as follows,
with segments with significant balances shown separately:
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
||
|
|
|
|||||||
|
|
|
|
||||||
|
June 30, |
|
2014 |
|
|
2013 |
|
||
|
|
|
|
||||||
|
Commercial Licensing |
|
$ |
19,099 |
|
|
$ |
18,460 |
|
|
Commercial Other |
|
|
3,934 |
|
|
|
2,272 |
|
|
Rest of the segments |
|
|
2,125 |
|
|
|
1,667 |
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
25,158 |
|
|
$ |
22,399 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 15 Ń OTHER LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
||
|
|
|
|||||||
|
|
|
|
||||||
|
June 30, |
|
2014 |
|
|
2013 |
|
||
|
|
|
|
||||||
|
Tax contingencies and other tax
liabilities |
|
$ |
10,510 |
|
|
$ |
9,548 |
|
|
Other |
|
|
1,084 |
|
|
|
452 |
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
11,594 |
|
|
$ |
10,000 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 16 Ń COMMITMENTS AND GUARANTEES
Construction and Operating Leases
We
have committed $880 million for constructing new buildings, building
improvements, and leasehold improvements as of June 30, 2014.
We have operating leases
for most U.S. and international sales and support offices, research and
development facilities, manufacturing facilities, and certain equipment. Rental
expense for facilities operating leases was $874 million, $711 million, and
$639 million, in fiscal years 2014, 2013, and 2012, respectively. Future
minimum rental commitments under non-cancellable facilities operating leases in
place as of June 30, 2014 are as follows:
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|||
|
|
|
|||
|
Year Ending June 30, |
|
|
|
|
|
|
|
|||
|
2015 |
|
$ |
878 |
|
|
2016 |
|
|
748 |
|
|
2017 |
|
|
671 |
|
|
2018 |
|
|
598 |
|
|
2019 |
|
|
456 |
|
|
Thereafter |
|
|
1,063 |
|
|
|
|
|||
|
Total |
|
$ |
4,414 |
|
|
|
|
|
|
|
Indemnifications
We
provide indemnifications of varying scope and size to certain customers against
claims of intellectual property infringement made by third parties arising from
the use of our products and certain other matters. We evaluate estimated losses
for these indemnifications, and we consider such factors as the degree of
probability of an unfavorable outcome and the ability to make a reasonable
estimate of the amount of loss. To date, we have not encountered significant
costs as a result of these obligations and have not accrued any liabilities
related to these indemnifications in our consolidated financial statements.
NOTE 17 Ń CONTINGENCIES
Antitrust, Unfair Competition, and Overcharge Class
Actions
A
large number of antitrust and unfair competition class action lawsuits were
filed against us in various state, federal, and Canadian courts on behalf of
various classes of direct and indirect purchasers of our PC operating system
and certain other software products between 1999 and 2005.
We
obtained dismissals or reached settlements of all claims made in the United
States. Under the settlements, generally class members can obtain vouchers that
entitle them to be reimbursed for purchases of a wide variety of
platform-neutral computer hardware and software. The total value of vouchers
that we may issue varies by state. We will make available to certain schools a
percentage of those vouchers that are not issued or claimed (one-half to
two-thirds depending on the state). The total value of vouchers we ultimately
issue will depend on the number of class members who make claims and are issued
vouchers. We estimate the total remaining cost of the settlements is
approximately $400 million, all of which had been accrued as of June 30,
2014.
Three similar cases pending in British Columbia,
Ontario, and Quebec, Canada have not been settled. In March 2010, the court in
the British Columbia case certified it as a class action. The plaintiffs successfully
appealed a British Columbia Court of Appeal decision reversing class
certification and dismissing the case. In October 2013, the Canadian Supreme
Court reversed the appellate court and reinstated part of the British Columbia
case, which is now scheduled for trial in September 2015. The other two cases
were inactive pending action by the Supreme Court on the British Columbia case.
Other Antitrust Litigation and Claims
Novell litigation
In
November 2004, Novell, Inc. (ŇNovellÓ) filed a complaint in U.S. District Court
for the District of Utah (later transferred to federal court in Maryland),
asserting antitrust and unfair competition claims against us related to
NovellŐs ownership of WordPerfect and other productivity applications during
the period between June 1994 and March 1996. After the trial court dismissed or
granted summary judgment on a number of NovellŐs claims, trial of the one
remaining claim took place in late 2011 and resulted in a mistrial. In July
2012, the trial court granted MicrosoftŐs motion for judgment as a matter of
law. Novell appealed this decision to the U.S. Court of Appeals for the Tenth
Circuit, which affirmed the trial courtŐs decision in September 2013. The Supreme
Court denied NovellŐs petition for review in April 2014.
Go Computer litigation
In
June 2005, GO Computer Inc. and co-founder Jerry Kaplan filed a complaint in
California state court asserting antitrust claims under the Cartwright Act
related to the business of the former GO Corporation in the early 1990s and its
successor in interest, Lucent Corporation in the early 2000s. All claims prior
to June 2001 have been dismissed with prejudice as barred by the statute of
limitations. After a mini-trial on standing issues, the case is now moving
forward with discovery, and a trial is set for September 2015.
China State
Administration for Industry and Commerce investigation
On July 28, 2014,
Microsoft was informed that ChinaŐs State Administration for Industry and
Commerce (SAIC) had begun a formal investigation relating to ChinaŐs
Anti-Monopoly Law, and the SAIC conducted onsite inspections of Microsoft
offices in Beijing, Shanghai, Guangzhou, and Chengdu. SAIC has stated the
investigation relates to compatibility, bundle sales, and file verification
issues related to Windows and Office software.
Patent and Intellectual Property Claims
Motorola litigation
In
October 2010, Microsoft filed patent infringement complaints against Motorola
Mobility (ŇMotorolaÓ) with the International Trade Commission (ŇITCÓ) and in
U.S. District Court in Seattle for infringement of nine Microsoft patents by
MotorolaŐs Android devices. Since then, Microsoft and Motorola have filed
additional claims against each other with the ITC, in federal district courts
in Seattle, Wisconsin, Florida, and California, and in courts in Germany and
the United Kingdom. The nature of the claims asserted and status of individual
matters are summarized below.
International Trade Commission
In
May 2012, the ITC issued a limited exclusion order against Motorola on one
Microsoft patent, which became effective in July 2012 and was affirmed on
appeal in December 2013. In July 2013, Microsoft filed an action in U.S.
District Court in Washington, D.C. seeking an order to compel enforcement of
the ITCŐs May 2012 import ban against infringing Motorola products by the
Bureau of Customs and Border Protection (ŇCBPÓ), after learning that CBP had
failed to fully enforce the order.
In
November 2010, Motorola filed an action against Microsoft with the ITC alleging
infringement of five Motorola patents by Xbox consoles and accessories and
seeking an exclusion order to prohibit importation of the allegedly infringing
Xbox products. At MotorolaŐs request, the ITC terminated its investigation of
four Motorola patents. In March 2013, the ITC affirmed there was no violation
of the remaining Motorola patent. Motorola appealed the ITCŐs decision to the
U.S. Court of Appeals for the Federal Circuit.
U.S. District Court
The
Seattle District Court case filed in October 2010 by Microsoft as a companion
to MicrosoftŐs ITC case against Motorola was stayed pending the outcome of the
ITC case.
In
November 2010, Microsoft sued Motorola for breach of contract in U.S. District
Court in Seattle, alleging that Motorola breached its commitments to
standards-setting organizations to license to Microsoft certain patents on
reasonable and non-discriminatory (ŇRANDÓ) terms and conditions. Motorola has
declared these patents essential to the implementation of the H.264 video
standard and the 802.11 Wi-Fi standard. In the Motorola ITC case described
above and in suits described below, Motorola or a Motorola affiliate
subsequently sued Microsoft on those patents in U.S. District Courts, in the
ITC, and in Germany. In February 2012, the Seattle District Court granted a
partial summary judgment in favor of Microsoft ruling that (1) Motorola
had committed to standards organizations to license its declared-essential
patents on RAND terms and conditions; and (2) Microsoft is a third-party
beneficiary of those commitments. After trial, the Seattle District Court set
per unit royalties for MotorolaŐs H.264 and 802.11 patents, which resulted in
an immaterial Microsoft liability. In September 2013, following trial of
MicrosoftŐs breach of contract claim, a jury awarded $14.5 million in damages
to Microsoft. Motorola appealed.
Cases
filed by Motorola in Wisconsin, California, and Florida, with the exception of
one currently stayed case in Wisconsin (a companion case to MotorolaŐs ITC
action), have been transferred to the U.S District Court in Seattle. Motorola
and Microsoft both seek damages as well as injunctive relief. The court has
stayed these cases on agreement of the parties.
Ą In
the transferred cases, Motorola asserts 15 patents are infringed by a range of
Microsoft products including mobile and PC operating system, productivity,
server, communication, browser and gaming products.
Ą In
the Motorola action originally filed in California, Motorola asserts Microsoft
violated antitrust laws in connection with MicrosoftŐs assertion of patents
against Motorola that Microsoft agreed to license to certain qualifying entities
on RAND terms and conditions.
Ą In
counterclaims, Microsoft asserts 14 patents are infringed by Motorola Android
devices and certain Motorola digital video recorders.
Germany
In July 2011,
Motorola filed patent infringement actions in Germany against Microsoft and
several Microsoft subsidiaries.
Ą Motorola
asserts two patents (one now expired) are essential to implementation of the
H.264 video standard, and Motorola alleges that H.264 capable products
including Xbox 360, Windows 7, Media Player, and Internet Explorer infringe
those patents. In May 2012, the court issued an injunction relating to all
H.264 capable Microsoft products in Germany, which Microsoft appealed. Orders in
the litigation pending in Seattle, Washington described above enjoin Motorola
from enforcing the German injunction.
Ą Motorola
asserts that one patent covers certain syncing functionality in the ActiveSync
protocol employed by Windows Phone 7, Outlook Mobile, Hotmail Mobile, Exchange
Online, Exchange Server, and Hotmail Server. In April 2013, the court stayed
the case pending the outcome of parallel proceedings in which Microsoft is
seeking to invalidate the patent. In November 2013, the Federal Patent Court
invalidated the originally issued patent claims, but ruled that certain new
amended claims were patentable. Both Motorola and Microsoft appealed. In June
2014, the court reopened infringement proceedings and scheduled a hearing in
November 2014.
Ą Microsoft
may be able to mitigate the adverse impact of any injunction by altering its
products to avoid MotorolaŐs infringement claims.
Ą Any
damages would be determined in separate proceedings.
In
lawsuits Microsoft filed in Germany in 2011 and 2012, Microsoft asserts that
Motorola Android devices infringe Microsoft patents and is seeking damages and
injunctions. In 2012, regional courts in Germany issued injunctions on three of
the Microsoft patents, which Motorola appealed. One judgment has been affirmed
on appeal (and Motorola has further appealed), and the other two appeals are
pending. In actions filed separately by Motorola to invalidate these patents,
the Federal Patent Court in 2013 and 2014 held the Microsoft patents invalid,
and Microsoft appealed. For the cases in which Microsoft obtained injunctions,
if Motorola were to prevail following all appeals, Motorola could have a claim
against Microsoft for damages caused by an erroneously granted injunction.
United Kingdom
In
December 2011, Microsoft filed an action against Motorola in the High Court of
Justice, Chancery Division, Patents Court, in London, England, seeking to
revoke the UK part of the European patent asserted by Motorola in Germany
against the ActiveSync protocol. In February 2012, Motorola counterclaimed
alleging infringement of the patent and seeking damages and an injunction. In
December 2012, the court ruled that MotorolaŐs patent is invalid. The court
also ruled that the patent, even if valid, would be licensed under the grant-back
clause in GoogleŐs ActiveSync license. Motorola appealed and the appeals court
affirmed the lower courtŐs ruling in MicrosoftŐs favor in November 2013.
Motorola has exhausted all appeals and the rulings in MicrosoftŐs favor are
final.
IPCom patent litigation
IPCom GmbH & Co. is a German company that holds
a large portfolio of mobile technology related patents spanning about 170
patent families and addressing a broad range of cellular technologies. IPCom
has asserted 19 of these patents in litigation against Nokia and many of the
leading cell phone companies and operators. Three of the infringement suits against
Nokia (now assumed by Microsoft through the NDS acquisition) are still pending
in courts in Germany, England, and Italy. These courts have held a number of
IPComŐs patents were invalid or not infringed. We continue to contest the
validity or infringement of the patents remaining in dispute.
Interdigital patent litigation
InterDigital Technology Corporation and
InterDigital Communications Corporation (collectively, ŇIDTÓ) filed four patent
infringement cases against Nokia in the ITC and in U.S. District Court for the
District of Delaware between 2007 and 2013. We are being substituted for Nokia
in these cases. Each case includes other co-defendants because most of the
patents at issue allegedly relate to 3G and 4G wireless communications
standards essential functionality. The suite of cases include three ITC
investigations where IDT is seeking an order excluding importation of 3G and 4G
phones into the U.S. and one active case in U.S. District Court in Delaware
seeking an injunction and damages.
European copyright levies
We have assumed from
Nokia all potential liability due to NokiaŐs alleged failure to pay Ňprivate
copying leviesÓ in various European countries based upon sale of memory cards
and mobile phones that incorporate blank memory. The levies are based upon
a 2001 EU Directive establishing a right for end users to make copies of
copyrighted works for personal or private use, but also allowing the collection
of levies based upon sales of blank media or recording devices to compensate
copyright holders for private copying. Various collecting societies in EU
countries initiated litigation against Nokia, stating that Nokia must pay
levies not only based upon sales of blank memory cards, but also phones that
include blank memory for data storage on the phones, regardless of actual usage
of that memory. The most significant cases against Nokia are pending in
Germany and Austria, due to both high volume of sales and high levy amounts
sought in these countries. We are litigating against certain collecting
societies on the basis that the levy schemes exceed what the EU Directive and
European Court of Justice decisions permit.
Other patent and intellectual property
claims
In
addition to these cases, there are approximately 90 other patent infringement
cases pending against Microsoft.
Product-Related
Litigation
U.S. cell phone litigation
Nokia,
along with other handset manufacturers and network operators, is a defendant in
19 lawsuits filed in the Superior Court for the District of Columbia by
individual plaintiffs who allege that radio emissions from cellular handsets
caused their brain tumors and other adverse health effects. We have assumed
responsibility for these claims as part of the NDS acquisition. Nine of these
cases were filed in 2002 and are consolidated for certain pre-trial
proceedings; the remaining ten cases are stayed. In a separate 2009 decision,
the Court of Appeals for the District of Columbia held that adverse health
effect claims arising from the use of cellular handsets that operate within the
U.S. Federal Communications Commission radio frequency emission guidelines
(ŇFCC GuidelinesÓ) are pre-empted by federal law. The plaintiffs allege that
their handsets either operated outside the FCC Guidelines or were manufactured
before the FCC Guidelines went into effect. The lawsuits also allege an
industry-wide conspiracy to manipulate the science and testing around emission
guidelines. In September 2013, defendants in the consolidated cases moved to
exclude plaintiffsŐ expert evidence of general causation on the basis of flawed
scientific methodologies. The motion was heard in December 2013 and January
2014. In March 2014, defendants filed a separate motion to preclude plaintiffsŐ
general causation testimony on the ground that it is pre-empted by federal law
because the experts challenge the safety of all cellular handsets, including
those that comply with the FCC Guidelines. Both motions are pending.
Canadian cell phone class
action
Nokia,
along with other handset manufacturers and network operators, is a defendant in
a 2013 class action lawsuit filed in the Supreme Court of British Columbia by a
purported class of Canadians who have used cellular phones for at least 1600
hours, including a subclass of users with brain tumors. Microsoft was served
with the complaint in June 2014. The litigation is not yet active as several
defendants remain to be served.
Other
We
also are subject to a variety of other claims and suits that arise from time to
time in the ordinary course of our business. Although management currently
believes that resolving claims against us, individually or in aggregate, will
not have a material adverse impact on our consolidated financial statements,
these matters are subject to inherent uncertainties and managementŐs view of
these matters may change in the future.
As
of June 30, 2014, we had accrued aggregate liabilities of $780 million in
other current liabilities and $81 million in other long-term liabilities for
all of our legal matters that were contingencies as of that date. While we
intend to defend these matters vigorously, adverse outcomes that we estimate
could reach approximately $2.0 billion in aggregate beyond recorded amounts are
reasonably possible. Were unfavorable final outcomes to occur, there exists the
possibility of a material adverse impact on our consolidated financial
statements for the period in which the effects become reasonably estimable. Substantially
all changes from the prior quarter in these accruals and estimates are
attributable to matters involving Nokia that we assumed as a result of the NDS
acquisition.
NOTE 18 Ń STOCKHOLDERSŐ EQUITY
Shares
Outstanding
Shares of
common stock outstanding were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Balance, beginning of year |
|
|
8,328 |
|
|
|
8,381 |
|
|
|
8,376 |
|
|
Issued |
|
|
86 |
|
|
|
105 |
|
|
|
147 |
|
|
Repurchased |
|
|
(175 |
) |
|
|
(158 |
) |
|
|
(142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance, end of year |
|
|
8,239 |
|
|
|
8,328 |
|
|
|
8,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Repurchases
On
September 16, 2013, our Board of Directors approved a new share repurchase
program authorizing up to $40.0 billion in share repurchases. The share
repurchase program became effective on October 1, 2013, has no expiration
date, and may be suspended or discontinued at any time without notice. This new
share repurchase program replaced the share repurchase program that was
announced on September 22, 2008 and expired on September 30, 2013. As of
June 30, 2014, $35.1 billion remained of our $40.0 billion share
repurchase program. All repurchases were made using cash resources.
We repurchased the following shares of common stock
under the above-described repurchase plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
||||||
|
|
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Year Ended June 30, |
|
2014 (a) |
|
|
2013 (b) |
|
|
2012 (b) |
|
|||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
First quarter |
|
|
47 |
|
|
$ |
1,500 |
|
|
|
33 |
|
|
$ |
1,000 |
|
|
|
38 |
|
|
$ |
1,000 |
|
|
Second quarter |
|
|
53 |
|
|
|
2,000 |
|
|
|
58 |
|
|
|
1,607 |
|
|
|
39 |
|
|
|
1,000 |
|
|
Third quarter |
|
|
47 |
|
|
|
1,791 |
|
|
|
36 |
|
|
|
1,000 |
|
|
|
31 |
|
|
|
1,000 |
|
|
Fourth quarter |
|
|
28 |
|
|
|
1,118 |
|
|
|
31 |
|
|
|
1,000 |
|
|
|
34 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
|
175 |
|
|
$ |
6,409 |
|
|
|
158 |
|
|
$ |
4,607 |
|
|
|
142 |
|
|
$ |
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Of
the 175 million shares repurchased in fiscal year 2014, 128 million shares were
repurchased for $4.9 billion under the share repurchase program approved by our Board of Directors on
September 16, 2013 and 47 million shares were repurchased for $1.5 billion
under the share repurchase program that was announced on September 22, 2008 and
expired on September 30, 2013.
(b) All shares repurchased in
fiscal years 2013 and 2012 were repurchased under the repurchase plan that was
announced on September 22, 2008 and expired on September 30, 2013.
The above table excludes shares repurchased to
settle statutory employee tax withholding related to the vesting of stock
awards.
Dividends
In fiscal year 2014, our Board of Directors
declared the following dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Declaration Date |
|
Dividend Per Share |
|
|
Record Date |
|
|
Total Amount |
|
|
Payment Date |
|
|||||||||||
|
|
|
||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|||||||||||
|
|
|
|
|
|
|||||||||||||||||||
|
September 16, 2013 |
|
$ |
0.28 |
|
|
|
November 21, 2013 |
|
|
$ |
2,332 |
|
|
|
December 12, 2013 |
|
|||||||
|
November 19, 2013 |
|
$ |
0.28 |
|
|
|
February 20, 2014 |
|
|
$ |
2,322 |
|
|
|
March 13, 2014 |
|
|||||||
|
March 11, 2014 |
|
$ |
0.28 |
|
|
|
May 15, 2014 |
|
|
$ |
2,309 |
|
|
|
June 12, 2014 |
|
|||||||
|
June 10, 2014 |
|
$ |
0.28 |
|
|
|
August 21, 2014 |
|
|
$ |
2,307 |
|
|
|
September 11, 2014 |
|
|||||||
|
|
|
||||||||||||||||||||||
The
dividend declared on June 10, 2014 will be paid after the filing date of
this Form 10-K and was included in other current liabilities as of
June 30, 2014.
In fiscal year
2013, our Board of Directors declared the following dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date |
|
Dividend Per Share |
|
|
Record Date |
|
|
Total Amount |
|
|
Payment Date |
|
||||
|
|
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
||||
|
|
|
|
|
|
||||||||||||
|
September 18, 2012 |
|
$ |
0.23 |
|
|
|
November 15, 2012 |
|
|
$ |
1,933 |
|
|
|
December 13, 2012 |
|
|
November 28, 2012 |
|
$ |
0.23 |
|
|
|
February 21, 2013 |
|
|
$ |
1,925 |
|
|
|
March 14, 2013 |
|
|
March 11, 2013 |
|
$ |
0.23 |
|
|
|
May 16, 2013 |
|
|
$ |
1,921 |
|
|
|
June 13, 2013 |
|
|
June 12, 2013 |
|
$ |
0.23 |
|
|
|
August 15, 2013 |
|
|
$ |
1,916 |
|
|
|
September 12, 2013 |
|
|
|
|
|||||||||||||||
The dividend
declared on June 12, 2013 was included in other current liabilities as of
June 30, 2013.
NOTE 19 Ń ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table summarizes the changes in
accumulated other comprehensive income by component:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
(In millions) |
|
|
|
|
|
|
|
|
|
||||||
|
|
|
||||||||||||||
|
|
|
|
|
||||||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
||||||
|
|
|
|
|
||||||||||||
|
Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
||||||||||||
|
Accumulated other comprehensive income (loss) balance, beginning of
period |
|
$ |
66 |
|
|
$ |
92 |
|
|
$ |
(163 |
) |
|||
|
Unrealized gains
(losses), net of tax effects of $2, $54 and $127 |
|
|
63 |
|
|
|
101 |
|
|
|
236 |
|
|||
|
Reclassification
adjustments for losses (gains) included in revenue |
|
|
(104 |
) |
|
|
(195 |
) |
|
|
29 |
|
|||
|
Tax expense (benefit)
included in provision for income taxes |
|
|
6 |
|
|
|
68 |
|
|
|
(10 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Amounts reclassified from
accumulated other comprehensive income |
|
|
(98 |
) |
|
|
(127 |
) |
|
|
19 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net current period other
comprehensive income (loss) |
|
|
(35 |
) |
|
|
(26 |
) |
|
|
255 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Accumulated other
comprehensive income balance, end of period |
|
$ |
31 |
|
|
$ |
66 |
|
|
$ |
92 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
||||||||||||
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
||||||||||||
|
Accumulated other
comprehensive income balance, beginning of period |
|
$ |
1,794 |
|
|
$ |
1,431 |
|
|
$ |
1,821 |
|
|||
|
Unrealized gains
(losses), net of tax effects of $1,067, $244 and $(93) |
|
|
2,053 |
|
|
|
453 |
|
|
|
(172 |
) |
|||
|
Reclassification
adjustments for gains included in other income (expense) |
|
|
(447 |
) |
|
|
(139 |
) |
|
|
(335 |
) |
|||
|
Tax expense included in
provision for income taxes |
|
|
131 |
|
|
|
49 |
|
|
|
117 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Amounts reclassified from
accumulated other comprehensive income |
|
|
(316 |
) |
|
|
(90 |
) |
|
|
(218 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net current period other
comprehensive income (loss) |
|
|
1,737 |
|
|
|
363 |
|
|
|
(390 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Accumulated other
comprehensive income balance, end of period |
|
$ |
3,531 |
|
|
$ |
1,794 |
|
|
$ |
1,431 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
||||||||||||
|
Translation Adjustments
and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
||||||||||||
|
Accumulated other
comprehensive income (loss) balance, beginning of period |
|
$ |
(117 |
) |
|
$ |
(101 |
) |
|
$ |
205 |
|
|||
|
Translation adjustments
and other, net of tax effects of $12, $(8) and $(165) |
|
|
263 |
|
|
|
(16 |
) |
|
|
(306 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Accumulated other
comprehensive loss balance, end of period |
|
$ |
146 |
|
|
$ |
(117 |
) |
|
$ |
(101 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Accumulated other
comprehensive income, end of period |
|
$ |
3,708 |
|
|
$ |
1,743 |
|
|
$ |
1,422 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
NOTE 20 Ń EMPLOYEE STOCK AND SAVINGS PLANS
We
grant stock-based compensation to directors and employees. At June 30,
2014, an aggregate of 346 million shares were authorized for future grant under
our stock plans, covering stock options, stock awards, and leadership stock
awards. Awards that expire or are canceled without delivery of shares generally
become available for issuance under the plans. We issue new shares of Microsoft
common stock to satisfy exercises and vesting of awards granted under all of
our stock plans.
Stock-based compensation expense and related income
tax benefits were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Stock-based compensation expense |
|
$ |
2,446 |
|
|
$ |
2,406 |
|
|
$ |
2,244 |
|
|
Income tax benefits related to stock-based
compensation |
|
$ |
830 |
|
|
$ |
842 |
|
|
$ |
785 |
|
|
|
|
|||||||||||
Stock Plans
Stock awards
Stock
awards (ŇSAsÓ) are grants that entitle the holder to shares of Microsoft common
stock as the award vests. SAs generally vest over a four or five-year period.
Executive incentive plan
Under
the Executive Incentive Plan (ŇEIPÓ), the Compensation Committee awards
performance-based compensation comprising both cash and SAs to executive
officers and certain senior executives. For executive officers, their awards
are based on an aggregate incentive pool equal to a percentage of consolidated
operating income. For fiscal years 2014, 2013, and 2012, the pool was 0.44%,
0.35%, and 0.30% of operating income, respectively. The SAs vest ratably in
August of each of the four years following the grant date. The final cash
awards will be determined after each performance period based on individual and
business performance.
Activity for all stock plans
The fair value of each award was estimated on the
date of grant using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Dividends per share
(quarterly amounts) |
|
$ |
0.23 - $ 0.28 |
|
|
$ |
0.20 - $ 0.23 |
|
|
$ |
0.16 - $ 0.20 |
|
|
Interest rates range |
|
|
1.3% - 1.8% |
|
|
|
0.6% - 1.1% |
|
|
|
0.7% - 1.7% |
|
|
|
|
|||||||||||
During fiscal
year 2014, the following activity occurred under our stock plans:
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Weighted Average Grant-Date Fair Value |
|
||||
|
|
|
|||||||
|
(In millions) |
|
|
|
|
||||
|
|
||||||||
|
Stock Awards |
|
|||||||
|
|
|
|
||||||
|
Nonvested balance, beginning of year |
|
|
273 |
|
|
$ |
25.50 |
|
|
Granted (a) |
|
|
103 |
|
|
$ |
31.50 |
|
|
Vested |
|
|
(93 |
) |
|
$ |
25.12 |
|
|
Forfeited |
|
|
(24 |
) |
|
$ |
27.01 |
|
|
|
|
|
|
|
|
|||
|
Nonvested balance, end of year |
|
|
259 |
|
|
$ |
27.88 |
|
|
|
|
|
|
|
|
|
|
|
(a) Includes
four million shares in stock replacement awards related to the acquisition of
NDS. The weighted average grant-date fair value was $37.64.
As
of June 30, 2014, there was approximately $5.2 billion of total
unrecognized compensation costs related to stock awards. These costs are
expected to be recognized over a weighted average period of 3 years.
During fiscal years 2013
and 2012, the following activity occurred under our stock plans:
|
|
|
|
|
|
|
|
|
|
|||
|
(In millions, except fair values) |
|
2013 |
|
|
2012 |
|
|||||
|
|
|
||||||||||
|
|
|
|
|||||||||
|
Stock Awards |
|
|
|
|
|
|
|||||
|
|
|
|
|||||||||
|
Awards granted |
|
|
104 |
|
|
|
110 |
|
|||
|
Weighted average grant-date fair value |
|
$ |
28.37 |
|
|
$ |
24.60 |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Total
vest-date fair value of stock awards vested was $3.2 billion, $2.8 billion, and
$2.4 billion, for fiscal years 2014, 2013, and 2012, respectively.
Employee Stock Purchase Plan
We have an employee stock purchase plan (the
ŇPlanÓ) for all eligible employees. Shares of our common stock may be purchased
by employees at three-month intervals at 90% of the fair market value on the
last trading day of each three-month period. Employees may purchase shares
having a value not exceeding 15% of their gross compensation during an offering
period. Employees purchased the following shares during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Shares purchased |
|
|
18 |
|
|
|
20 |
|
|
|
20 |
|
|
Average price per share |
|
$ |
33.60 |
|
|
$ |
26.81 |
|
|
$ |
25.03 |
|
|
|
|
|||||||||||
At June 30, 2014, 173 million shares of
our common stock were reserved for future issuance through the Plan.
Savings Plan
We
have a savings plan in the U.S. that qualifies under Section 401(k) of the
Internal Revenue Code, and a number of savings plans in international locations.
Participating U.S. employees may contribute up to 75% of their salary, but not
more than statutory limits. We contribute fifty cents for each dollar of the
first 6% a participant contributes in this plan, with a maximum contribution of
the lesser of 3% of a participantŐs earnings or 3% of the IRS compensation
limit for the given year. Matching contributions for all plans were $420 million,
$393 million, and $373 million in fiscal years 2014, 2013, and 2012,
respectively, and were expensed as contributed. Matching contributions are
invested proportionate to each participantŐs voluntary contributions in the
investment options provided under the plan. Investment options in the U.S. plan
include Microsoft common stock, but neither participant nor our matching
contributions are required to be invested in Microsoft common stock.
NOTE 21 Ń SEGMENT INFORMATION AND GEOGRAPHIC DATA
In its operation of the business, management,
including our chief operating decision maker, the companyŐs Chief Executive
Officer, reviews certain financial information, including segmented internal
profit and loss statements prepared on a basis not consistent with U.S. GAAP.
The segment information in this note is reported on that basis.
During the first quarter of fiscal year 2014, we
changed our organizational structure as part of our transformation to a devices
and services company. As a result, information that our chief operating
decision maker regularly reviews for purposes of allocating resources and
assessing performance changed. Therefore, beginning in fiscal year 2014, we
reported our financial performance based on our new segments; D&C
Licensing, D&C Hardware, D&C Other, Commercial Licensing, and
Commercial Other. We have recast certain prior period amounts to conform to the
way we internally managed and monitored segment performance during fiscal year
2014.
On April 25, 2014, we acquired substantially
all of NDS. See Note 9 Đ Business Combinations for additional details. NDS has
been included in our consolidated results of operations starting on the
acquisition date. We report the financial performance of the acquired business in
our new Phone Hardware segment. Prior to the acquisition of NDS, financial
results associated with our joint strategic initiatives with Nokia were
reflected in our D&C Licensing segment. The contractual relationship with
Nokia related to those initiatives terminated in conjunction with the
acquisition. With the creation of the new Phone Hardware segment, the D&C
Hardware segment was renamed Computing and Gaming Hardware in the fourth
quarter of fiscal year 2014.
Our
reportable segments are described below.
Devices and Consumer
Our D&C segments develop, manufacture, market,
and support products and services designed to entertain and connect people,
increase personal productivity, help people simplify tasks and make more
informed decisions online, and help advertisers connect with audiences. Our
D&C segments are:
Ą D&C
Licensing, comprising: Windows, including all OEM licensing (ŇWindows OEMÓ)
and other non-volume licensing and academic volume licensing of the Windows
operating system and related software; non-volume licensing of Microsoft
Office, comprising the core Office product set, for consumers (ŇOffice ConsumerÓ);
Windows Phone operating system, including related patent licensing; and certain
other patent licensing revenue;
Ą Computing and Gaming Hardware,
comprising: Xbox gaming and entertainment consoles and accessories,
second-party and third-party video game royalties, and Xbox Live subscriptions
(ŇXbox PlatformÓ); Surface devices and accessories; and Microsoft PC
accessories;
Ą Phone
Hardware, comprising: Lumia Smartphones and other non-Lumia phones, beginning
with the acquisition of NDS; and
Ą D&C
Other, comprising: Resale, including Windows Store, Xbox Live transactions,
and Windows Phone Store; search advertising; display advertising; Office 365
Consumer, comprising Office 365 Home and Office 365 Personal; Studios,
comprising first-party video games; our retail stores; and certain other
consumer products and services not included in the categories above.
Commercial
Our Commercial segments develop, market, and
support software and services designed to increase individual, team, and
organizational productivity and efficiency, including simplifying everyday
tasks through seamless operations across the userŐs hardware and software. Our
Commercial segments are:
Ą Commercial
Licensing, comprising: server products, including Windows Server, Microsoft
SQL Server, Visual Studio, System Center, and related Client Access Licenses
(ŇCALsÓ); Windows Embedded; volume licensing of the Windows operating system,
excluding academic (ŇWindows CommercialÓ); Microsoft Office for business,
including Office, Exchange, SharePoint, Lync, and related CALs (ŇOffice
CommercialÓ); Microsoft Dynamics business solutions, excluding Dynamics CRM
Online; and Skype; and
Ą Commercial
Other, comprising: Enterprise Services, including Premier Support Services
and Microsoft Consulting Services; Commercial Cloud, comprising Office 365
Commercial, other Microsoft Office online offerings, Dynamics CRM Online, and
Microsoft Azure; and certain other commercial products and online services not
included in the categories above.
Revenue
and cost of revenue are generally directly attributed to our segments. Certain
revenue contracts are allocated among the segments based on the relative value
of the underlying products and services. Cost of revenue is directly charged to
our hardware segments. For the remaining segments, cost of revenue is directly
charged in most cases and allocated in certain cases, generally using a
relative revenue methodology.
We
do not allocate operating expenses to our segments. Rather, we allocate them to
our two segment groups, Devices and Consumer and Commercial. Due to the
integrated structure of our business, allocations of expenses are made in
certain cases to incent cross-collaboration among our segment groups so that a
segment group is not solely burdened by the cost of a mutually beneficial
activity as we seek to deliver seamless experiences across devices, whether
on-premises or in the cloud.
Operating expenses are attributed to our segment
groups as follows:
Ą Sales
and marketing expenses are primarily recorded directly to each segment group
based on identified customer segment.
Ą Research
and development expenses are primarily shared across the segment groups based on
relative gross margin but are mapped directly in certain cases where the value
of the expense only accrues to that segment group.
Ą General
and administrative expenses are primarily allocated based on relative gross
margin.
Certain
corporate-level activity is not allocated to our segment groups, including
costs of: legal, including expenses, settlements, and fines; information
technology; human resources; finance; excise taxes; and integration and restructuring
costs.
Segment revenue and gross
margin were as follows during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||||
|
|
|
|
|
|
||||||||||
|
Year Ended June 30, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|
||||||||||
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
||||||||||
|
Devices and Consumer |
|
Licensing |
|
$ |
18,803 |
|
|
$ |
19,021 |
|
|
$ |
19,495 |
|
|
|
|
Hardware: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computing and Gaming
Hardware |
|
|
9,628 |
|
|
|
6,461 |
|
|
|
6,740 |
|
|
|
|
Phone Hardware |
|
|
1,985 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Total D&C Hardware |
|
|
11,613 |
|
|
|
6,461 |
|
|
|
6,740 |
|
|
|
|
Other |
|
|
7,258 |
|
|
|
6,618 |
|
|
|
6,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Total Devices and
Consumer |
|
|
37,674 |
|
|
|
32,100 |
|
|
|
32,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
Licensing |
|
|
42,027 |
|
|
|
39,686 |
|
|
|
37,126 |
|
|
|
|
Other |
|
|
7,547 |
|
|
|
5,660 |
|
|
|
4,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Total Commercial |
|
|
49,574 |
|
|
|
45,346 |
|
|
|
41,770 |
|
|
Corporate and Other |
|
|
|
|
(415 |
) |
|
|
403 |
|
|
|
(485 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total revenue |
|
|
|
$ |
86,833 |
|
|
$ |
77,849 |
|
|
$ |
73,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||||
|
|
|
|
|
|
||||||||||
|
Year Ended June 30, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|
||||||||||
|
Gross margin |
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
||||||||||
|
Devices and Consumer |
|
Licensing |
|
$ |
17,216 |
|
|
$ |
17,044 |
|
|
$ |
17,240 |
|
|
|
|
Hardware: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computing and Gaming Hardware |
|
|
893 |
|
|
|
956 |
|
|
|
2,495 |
|
|
|
|
Phone Hardware |
|
|
54 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Total D&C Hardware |
|
|
947 |
|
|
|
956 |
|
|
|
2,495 |
|
|
|
|
Other |
|
|
1,770 |
|
|
|
2,046 |
|
|
|
1,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Total Devices and Consumer |
|
|
19,933 |
|
|
|
20,046 |
|
|
|
21,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
Licensing |
|
|
38,604 |
|
|
|
36,261 |
|
|
|
34,463 |
|
|
|
|
Other |
|
|
1,856 |
|
|
|
921 |
|
|
|
579 |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Total Commercial |
|
|
40,460 |
|
|
|
37,182 |
|
|
|
35,042 |
|
|
Corporate and Other |
|
|
|
|
(494 |
) |
|
|
372 |
|
|
|
(582 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total gross margin |
|
|
|
$ |
59,899 |
|
|
$ |
57,600 |
|
|
$ |
56,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following is operating expenses by segment group.
As discussed above, we do not allocate operating expenses below cost of revenue
to our segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|||||||||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Devices and Consumer |
|
$ |
11,219 |
|
|
$ |
10,625 |
|
|
$ |
15,682 |
|
|
Commercial |
|
|
16,993 |
|
|
|
16,050 |
|
|
|
15,064 |
|
|
Corporate and Other |
|
|
3,928 |
|
|
|
4,161 |
|
|
|
3,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total operating expenses |
|
$ |
32,140 |
|
|
$ |
30,836 |
|
|
$ |
34,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following is operating income (loss) by segment group.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|||||||||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Devices and Consumer |
|
$ |
8,714 |
|
|
$ |
9,421 |
|
|
$ |
6,051 |
|
|
Commercial |
|
|
23,467 |
|
|
|
21,132 |
|
|
|
19,978 |
|
|
Corporate and Other |
|
|
(4,422 |
) |
|
|
(3,789 |
) |
|
|
(4,266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total operating income |
|
$ |
27,759 |
|
|
$ |
26,764 |
|
|
$ |
21,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and Other operating income includes adjustments to conform our internal
accounting policies to U.S. GAAP and corporate-level activity not specifically
attributed to a segment. Significant internal accounting policies that differ
from U.S. GAAP relate to revenue recognition, income statement classification,
and depreciation.
Corporate and Other activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Corporate (a) |
|
$ |
(3,888 |
) |
|
$ |
(4,236 |
) |
|
$ |
(3,671 |
) |
|
Other (adjustments to
U.S. GAAP): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue reconciling amounts (b) |
|
|
(415 |
) |
|
|
403 |
|
|
|
(485 |
) |
|
Cost of revenue reconciling amounts |
|
|
(79 |
) |
|
|
(31 |
) |
|
|
(97 |
) |
|
Operating expenses reconciling amounts |
|
|
(40 |
) |
|
|
75 |
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total Corporate and Other |
|
$ |
(4,422 |
) |
|
$ |
(3,789 |
) |
|
$ |
(4,266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Corporate
is presented on the basis of our internal accounting policies and excludes the
adjustments to U.S. GAAP that are presented separately in those line items.
(b) Revenue
reconciling amounts for fiscal year 2014 included a net $349 million of revenue
deferrals related to sales of certain devices bundled with other products and
services (ŇBundled OfferingsÓ). Revenue reconciling amounts for fiscal years
2012 and 2013 included the deferral and subsequent recognition, respectively, of
$540 million of revenue related to the Windows Upgrade Offer.
No sales to an individual customer or country other
than the United States accounted for more than 10% of fiscal year 2014, 2013,
or 2012 revenue. Revenue, classified by the major geographic areas in which our
customers are located, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|||||||||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
United States (a) |
|
$ |
43,474 |
|
|
$ |
41,344 |
|
|
$ |
38,846 |
|
|
Other countries |
|
|
43,359 |
|
|
|
36,505 |
|
|
|
34,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
86,833 |
|
|
$ |
77,849 |
|
|
$ |
73,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Includes
billings to OEMs and certain multinational organizations because of the nature
of these businesses and the impracticability of determining the geographic
source of the revenue.
Revenue from external customers, classified by significant product and
service offerings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|||||||||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
Year Ended June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
Microsoft Office system |
|
$ |
24,323 |
|
|
$ |
22,995 |
|
|
$ |
22,299 |
|
|
Windows PC operating system |
|
|
16,856 |
|
|
|
17,529 |
|
|
|
17,320 |
|
|
Server products and tools |
|
|
17,055 |
|
|
|
15,408 |
|
|
|
14,232 |
|
|
Xbox Platform |
|
|
8,643 |
|
|
|
7,100 |
|
|
|
8,045 |
|
|
Consulting and product support services |
|
|
4,767 |
|
|
|
4,372 |
|
|
|
3,976 |
|
|
Advertising |
|
|
4,016 |
|
|
|
3,387 |
|
|
|
3,181 |
|
|
Phone |
|
|
3,073 |
|
|
|
615 |
|
|
|
162 |
|
|
Surface |
|
|
1,883 |
|
|
|
853 |
|
|
|
0 |
|
|
Other |
|
|
6,217 |
|
|
|
5,590 |
|
|
|
4,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
86,833 |
|
|
$ |
77,849 |
|
|
$ |
73,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our total Commercial Cloud revenue was $2.8
billion, $1.3 billion, and $0.7 billion in fiscal years 2014, 2013, and 2012,
respectively. These amounts are included in their respective product categories
in the table above.
Assets are not allocated to segments for internal
reporting presentations. A portion of amortization and depreciation is charged
to the respective segment. It is impracticable for us to separately identify
the amount of amortization and depreciation by segment that is included in the
measure of segment profit or loss.
Long-lived assets, excluding financial instruments
and tax assets, classified by the location of the controlling statutory company
and with countries over 10% of the total shown separately, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|||||||||
|
|
|
|||||||||||
|
|
|
|
|
|||||||||
|
June 30, |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
|
|
|||||||||
|
United States |
|
$ |
17,653 |
|
|
$ |
16,615 |
|
|
$ |
14,081 |
|
|
Finland |
|
|
9,840 |
|
|
|
12 |
|
|
|
8 |
|
|
Luxembourg |
|
|
6,913 |
|
|
|
6,943 |
|
|
|
6,975 |
|
|
Other countries |
|
|
5,713 |
|
|
|
4,159 |
|
|
|
3,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
40,119 |
|
|
$ |
27,729 |
|
|
$ |
24,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 22 Ń QUARTERLY INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
(In millions, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
|
|
||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||||||||||||
|
Quarter Ended |
|
September 30 |
|
|
December 31 |
|
|
March 31 |
|
|
June 30 |
(a) |
|
Total |
(a) |
||||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||||||||||||
|
Fiscal Year 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||||||||||||
|
Revenue |
|
|
$ 18,529 |
|
|
|
$ 24,519 |
|
|
|
$ 20,403 |
|
|
|
$ 23,382 |
|
|
|
$ 86,833 |
|
|||||||||||||
|
Gross margin |
|
|
13,415 |
|
|
|
16,235 |
|
|
|
14,462 |
|
|
|
15,787 |
|
|
|
59,899 |
|
|||||||||||||
|
Net income |
|
|
5,244 |
|
|
|
6,558 |
|
|
|
5,660 |
|
|
|
4,612 |
(b) |
|
|
22,074 |
(b) |
|||||||||||||
|
Basic earnings per share |
|
|
0.63 |
|
|
|
0.79 |
|
|
|
0.68 |
|
|
|
0.56 |
|
|
|
2.66 |
|
|||||||||||||
|
Diluted earnings per share |
|
|
0.62 |
|
|
|
0.78 |
|
|
|
0.68 |
|
|
|
0.55 |
(b) |
|
|
2.63 |
(b) |
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||||||||||||
|
Fiscal Year 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||||||||||||
|
Revenue |
|
|
$ 16,008 |
|
|
|
$ 21,456 |
|
|
|
$ 20,489 |
|
|
|
$ 19,896 |
|
|
|
$ 77,849 |
|
|||||||||||||
|
Gross margin |
|
|
11,840 |
|
|
|
15,764 |
|
|
|
15,702 |
|
|
|
14,294 |
|
|
|
57,600 |
|
|||||||||||||
|
Net income |
|
|
4,466 |
|
|
|
6,377 |
|
|
|
6,055 |
(c) |
|
|
4,965 |
(d) |
|
|
21,863 |
(e) |
|||||||||||||
|
Basic earnings per share |
|
|
0.53 |
|
|
|
0.76 |
|
|
|
0.72 |
|
|
|
0.59 |
|
|
|
2.61 |
|
|||||||||||||
|
Diluted earnings per share |
|
|
0.53 |
|
|
|
0.76 |
|
|
|
0.72 |
(c) |
|
|
0.59 |
(d) |
|
|
2.58 |
(e) |
|||||||||||||
|
|
|
||||||||||||||||||||||||||||||||
(a)
NDS has been included in our consolidated results of operations starting
on April 25, 2014, the date of acquisition.
(b)
Includes a tax provision adjustment recorded in the fourth quarter of
fiscal year 2014 related to adjustments to prior yearsŐ liabilities for
intercompany transfer pricing which decreased net income by $458 million and
diluted earnings per share by $0.05.
(c) Includes
a charge related to a fine imposed by the European Commission in March 2013
which decreased net income by $733 million (Ű561 million) and diluted earnings
per share by $0.09.
(d) Includes
a charge for Surface RT inventory adjustments recorded in the fourth quarter of
fiscal year 2013, which decreased net income by $596 million and diluted
earnings per share by $0.07.
(e) Includes
a charge related to a fine imposed by the European Commission in March 2013
which decreased net income by $733 million (Ű561 million) and diluted earnings
per share by $0.09. Also includes a charge for Surface RT inventory adjustments
recorded in the fourth quarter of fiscal year 2013, which decreased net income
by $596 million and diluted earnings per share by $0.07.
NOTE 23 Ń SUBSEQUENT EVENT
On July 17, 2014, we announced a restructuring
plan to simplify our organization and align the recently acquired NDS business
with our companyŐs overall strategy. We will eliminate up to 18,000 positions
over the next year, including 12,500 professional and factory positions related
to the acquisition of NDS. We expect to incur pre-tax charges of approximately
$1.1 billion to $1.6 billion in fiscal year 2015.
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of Microsoft Corporation
Redmond, Washington
We
have audited the accompanying consolidated balance sheets of Microsoft
Corporation and subsidiaries (the ŇCompanyÓ) as of June 30, 2014 and 2013,
and the related consolidated statements of income, comprehensive income, cash
flows, and stockholdersŐ equity for each of the three years in the period ended
June 30, 2014. These financial statements are the responsibility of
the CompanyŐs management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Microsoft Corporation and
subsidiaries as of June 30, 2014 and 2013, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2014, in conformity with accounting principles generally accepted
in the United States of America.
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the CompanyŐs internal control over
financial reporting as of June 30, 2014, based on the criteria established
in Internal Control Đ Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated July 31, 2014, expressed an unqualified opinion on the CompanyŐs
internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Seattle,
Washington
July 31, 2014
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not
applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Under
the supervision and with the participation of our management, including the
Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of our disclosure controls and procedures as required by Exchange
Act Rule 13a-15(b) as of the end of the period covered by this report. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective.
REPORT OF MANAGEMENT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the company. Internal control over
financial reporting is a process to provide reasonable assurance regarding the
reliability of our financial reporting for external purposes in accordance with
accounting principles generally accepted in the United States of America.
Internal control over financial reporting includes maintaining records that in
reasonable detail accurately and fairly reflect our transactions; providing
reasonable assurance that transactions are recorded as necessary for
preparation of our financial statements; providing reasonable assurance that
receipts and expenditures of company assets are made in accordance with
management authorization; and providing reasonable assurance that unauthorized
acquisition, use or disposition of company assets that could have a material
effect on our financial statements would be prevented or detected on a timely
basis. Because of its inherent limitations, internal control over financial
reporting is not intended to provide absolute assurance that a misstatement of
our financial statements would be prevented or detected.
Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control Đ Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Our assessment of, and conclusion on, the effectiveness
of internal control over financial reporting did not include the internal
controls of Nokia CorporationŐs Devices and Services business, acquired on
April 25, 2014, which is included in our 2014 consolidated financial
statements and represented approximately 9% of our total assets as of
June 30, 2014, and 2% of our total revenues for the year ended
June 30, 2014. Based on this evaluation, management concluded that the
companyŐs internal control over financial reporting was effective as of
June 30, 2014. There were no changes in our internal control over
financial reporting during the quarter ended June 30, 2014 that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. Deloitte & Touche LLP has
audited our internal control over financial reporting as of June 30, 2014;
their report is included in Item 9A.
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of Microsoft Corporation
Redmond, Washington
We
have audited the internal control over financial reporting of Microsoft
Corporation and subsidiaries (the ŇCompanyÓ) as of June 30, 2014, based on
criteria established in Internal Control Đ Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission. As described in the Report of Management on Internal Control over
Financial Reporting, management excluded from its assessment the internal
control over financial reporting at Nokia CorporationŐs Devices and Services
business, acquired on April 25, 2014 and whose financial statements constitute
9% of total assets as of
June 30, 2014 and 2% of total revenues for the year ended
June 30, 2014. Accordingly, our audit did not include the internal control over
financial reporting at Nokia CorporationŐs Devices and Services business. The
CompanyŐs management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Report
of Management on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the CompanyŐs internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other procedures
as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A
companyŐs internal control over financial reporting is a process designed by,
or under the supervision of, the companyŐs principal executive and principal
financial officers, or persons performing similar functions, and effected by
the companyŐs board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A companyŐs internal control
over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companyŐs assets that could have a
material effect on the financial statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of June 30, 2014, based on
the criteria established in Internal Control Đ Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended June 30, 2014, of the Company and
our report dated July 31, 2014, expressed an unqualified opinion on those
financial statements.
/s/ DELOITTE & TOUCHE LLP
Seattle,
Washington
July 31, 2014
ITEM 9B. OTHER INFORMATION
Effective
July 1, 2014, we amended our Bylaws to establish the size of the Board of
Directors as a range of 5 to 14 members, and to designate the chief executive
officer as the sole officer with authority to appoint corporate officers. The
amended Bylaws are filed as Exhibit 3.2 to this Report.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
A
list of our executive officers and biographical information appears in Part I,
Item 1 of this Form 10-K. Information about our directors may be found
under the caption ŇOur director nomineesÓ in our Proxy Statement for the Annual
Meeting of Shareholders to be held December 3, 2014 (the ŇProxy
StatementÓ). Information about our Audit Committee may be found under the
caption ŇBoard committeesÓ in the Proxy Statement. That information is
incorporated herein by reference.
The
information in the Proxy Statement set forth under the caption ŇSection 16(a)
Beneficial ownership reporting complianceÓ is incorporated herein by reference.
We
have adopted the Microsoft Finance Code of Professional Conduct (the Ňfinance
code of ethicsÓ), a code of ethics that applies to our Chief Executive Officer,
Chief Financial Officer, Chief Accounting Officer and Corporate Controller, and
other finance organization employees. The finance code of ethics is publicly
available on our website at www.microsoft.com/investor/MSFinanceCode. If we
make any substantive amendments to the finance code of ethics or grant any
waiver, including any implicit waiver, from a provision of the code to our
Chief Executive Officer, Chief Financial Officer, or Chief Accounting Officer
and Corporate Controller, we will disclose the nature of the amendment or
waiver on that website or in a report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
The
information in the Proxy Statement set forth under the captions ŇDirector compensation,Ó
ŇNamed executive officer compensation,Ó ŇCompensation Committee interlocks and insider
participation,Ó and ŇCompensation Committee reportÓ is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
information in the Proxy Statement set forth under the captions ŇInformation regarding
beneficial ownership of principal shareholders, directors, and managementÓ and
ŇEquity compensation plan informationÓ is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The
information set forth in the Proxy Statement under the captions ŇDirector independenceÓ
and ŇCertain relationships and related transactionsÓ is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information
concerning principal accountant fees and services appears in the Proxy
Statement under the headings ŇFees billed by Deloitte & ToucheÓ and
ŇPolicy on Audit Committee pre-approval of audit and permissible non-audit services
of independent auditorÓ and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Financial
Statements and Schedules
The
financial statements are set forth under Item 8 of this Form 10-K, as
indexed below. Financial statement schedules have been omitted since they
either are not required, not applicable, or the information is otherwise
included.
|
|
|
|
|
|
|
Index to Financial Statements |
|
Page |
|
|
|
|
|
|||
|
|
|
|||
|
Income Statements |
|
|
48 |
|
|
|
|
|||
|
Comprehensive Income Statements |
|
|
49 |
|
|
|
|
|||
|
Balance Sheets |
|
|
50 |
|
|
|
|
|||
|
Cash Flows Statements |
|
|
51 |
|
|
|
|
|||
|
StockholdersŐ Equity Statements |
|
|
52 |
|
|
|
|
|||
|
Notes to Financial Statements |
|
|
53 |
|
|
|
|
|||
|
Report of Independent Registered Public
Accounting Firm |
|
|
90 |
|
(b) Exhibit
Listing
* Indicates
a management contract or compensatory plan or arrangement
** Furnished,
not filed
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned; thereunto duly authorized, in the City of Redmond, State of
Washington, on July 31, 2014.
|
|
|
MICROSOFT CORPORATION |
|
|
|
/S/ FRANK H. BROD |
|
Frank H. Brod |
|
Corporate Vice President, Finance and Administration; Chief Accounting Officer (Principal Accounting Officer) |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of Registrant and in the
capacities indicated on July 31, 2014.
|
|
|
|
|
Signature |
|
Title |
|
|
||
|
|
|
|
|
/s/ JOHN W. THOMPSON
John W.
Thompson |
|
Chairman |
|
|
|
|
|
/s/ SATYA NADELLA
Satya Nadella |
|
Director and
Chief Executive Officer |
|
|
|
|
|
/s/ STEVEN A. BALLMER
Steven A.
Ballmer |
|
Director |
|
|
|
|
|
/s/ DINA DUBLON
Dina Dublon |
|
Director |
|
|
|
|
|
/s/ WILLIAM H. GATES
III
William H.
Gates III |
|
Director |
|
|
|
|
|
/s/ MARIA M. KLAWE
Maria M. Klawe |
|
Director |
|
|
|
|
|
/s/ DAVID F. MARQUARDT
David F.
Marquardt |
|
Director |
|
|
|
|
|
/s/ G. MASON MORFIT
G. Mason
Morfit |
|
Director |
|
|
|
|
|
/s/ CHARLES H. NOSKI
Charles H.
Noski |
|
Director |
|
|
|
|
|
/s/ HELMUT PANKE
Helmut Panke |
|
Director |
|
|
|
|
|
/s/ AMY E. HOOD
Amy E. Hood |
|
Executive Vice President and Chief Financial
Officer (Principal
Financial Officer) |
|
|
|
|
|
/s/ FRANK H. BROD
Frank H. Brod |
|
Corporate Vice President, Finance and Administration; Chief Accounting Officer (Principal
Accounting Officer) |
Exhibit
3.2
BYLAWS
OF
MICROSOFT CORPORATION
ARTICLE I
Shareholders
1.1 Annual
Meeting. The annual meeting of
the shareholders of the Corporation for the election of directors and for the
transaction of such other business as properly may be submitted to such annual
meeting, shall be held at the hour and on the date designated by the Board of
Directors (ŇBoardÓ) or an authorized
committee of the Board.
1.2 Special
Meetings. Special meetings of
the shareholders of the Corporation, for any purpose or purposes, may be called
by the Board, an authorized committee of the Board, or one or more shareholders
to the extent permitted by the Articles of Incorporation. To be in proper form, a request for a special
meeting of shareholders submitted by one or more shareholders must:
(a) be in writing and be
delivered in person or by registered mail to the secretary of the Corporation;
(b) specify in reasonable detail
the purpose(s) of and the business proposed to be conducted at the special
meeting;
(c) suggest a date for the
special meeting, which date shall be no fewer than thirty (30) and no more than
ninety (90) days from the date on which the request is delivered to the
secretary of the Corporation; and
(d)
contain the information required of a Noticing Shareholder by
Section 1.13(b) of these Bylaws.
If
the Board determines a shareholder request for a special meeting complies with
the Articles of Incorporation and the provisions of these Bylaws, the Board
shall call and send notice of a special meeting for the purpose set forth in
such request within 30 days of receipt of the request. The Board shall determine the date for
such special meeting and the record date for shareholders entitled to notice of
and to vote at such meeting.
Given
the expense and resource commitment of holding a special meeting, in making the
decision to call a special meeting in response to shareholder requests that are
repetitious or overlapping, the Board shall have discretion as to the call and
purposes of a meeting and may refuse to call a meeting for a purpose identical
or similar to a purpose for which a previous special meeting was held in the
previous 120 days. Similarly, the
Board may decline to call a special meeting when, in its judgment the purpose
of the proposed meeting does not present a time sensitive issue that must be
addressed before the next scheduled annual meeting.
1.3 Business
at Annual and Special Meetings.
No business may be transacted at an annual or special meeting of
shareholders other than business that is
(a) specified
in a notice of meeting given by or at the direction of the Board or an
authorized committee of the Board,
(b) otherwise
brought before the meeting by or at the direction of the Board or an authorized
committee of the Board,
(c) specified
in a notice of meeting stated in a shareholder special meeting request pursuant
to Section 1.2 of these Bylaws, or
(d) otherwise
brought before an annual meeting:
(i)
by
(1) a shareholder that holds of record stock of the Corporation entitled to
vote at the meeting on such business (including any election of a director) (a
ŇRecord HolderÓ) or (2) a person (a
"Nominee Holder") that
holds such stock through a nominee or "street name" holder of record of such stock and can
demonstrate to the Corporation such indirect ownership of such stock and such
Nominee Holder's entitlement to vote such stock on such business, and
(ii) who
complies with the notice procedures set forth in Section 1.13 (Record Holders and Nominee Holders are
referred to as ŇNoticing ShareholdersÓ).
Clauses
(c) and (d) of this Section 1.3 shall be the exclusive means for a Noticing
Shareholder to make director nominations or submit other business before a
meeting of shareholders (other than proposals brought under Rule 14a-8 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and included in the Corporation's notice of
meeting, which proposals are not governed by these Bylaws).
1.4 Place
of Meetings. Meetings of
shareholders shall be held at such place within or outside the State of
Washington as determined by the Board, or an authorized committee of the Board,
pursuant to proper notice.
1.5 Notice. Written or electronic notice of each
shareholders' meeting stating the date, time, and place and, for a special
meeting, the purpose(s) for which the meeting is called, shall be given by the
Corporation not less than ten (10) (unless a greater period of notice is
required by law in a particular case) nor more than sixty (60) days prior to
the date of the meeting, to each shareholder of record, to the shareholder's
address as it appears on the current record of shareholders of the Corporation.
1.6 Quorum
of Shareholders. At any meeting
of the shareholders, a majority in interest of all the shares entitled to vote
on a matter, represented by shareholders of record in person or by proxy, shall
constitute a quorum of that voting group for action on that matter.
Once
a share is represented at a meeting, other than to object to holding the meeting
or transacting business, it is deemed to be present for quorum purposes for the
remainder of the meeting and for any adjournment to a new date, time, or place
unless a new record date is or must be set for the adjourned meeting.
If
a quorum exists, action on a matter is approved by a voting group if the votes
cast within the voting group favoring the action exceed the votes cast within
the voting group opposing the action, unless the question is one upon which by
express provision of the Washington Business Corporation Act, as amended
("WBCA"), or of the
Articles of Incorporation or of these Bylaws a different vote is required.
1.7 Adjournment. A majority of the shares represented at
the meeting, even if less than a quorum, may adjourn the meeting from time to
time. At a reconvened meeting at
which a quorum is present any business may be transacted at the meeting as may
have been brought at the adjourned meeting in accordance with Section 1.3. If a meeting is adjourned to a different
date, time, or place, notice need not be given of the new date, time, or place
if a new date, time, or place is announced at the meeting before adjournment;
however, if the WBCA requires that a new record date for the adjourned meeting
must be fixed, then notice of the adjourned meeting must be given to persons
who are shareholders as of the new record date.
1.8 Record
Date and Transfer Books. For
the purpose of determining shareholders who are entitled to notice of or to
vote at any meeting of shareholders or any adjournment thereof, or entitled to
receive payment of any dividend, or in order to make a determination of
shareholders for any other proper purpose, the Board may fix in advance a
record date for any such determination of shareholders, which date shall not be
more than seventy (70) days and, in case of a meeting of shareholders, not less
than ten (10) days prior to the date on which the particular action, requiring
such determination of shareholders, is to be taken.
If
no record date is fixed for such purposes, the date on which notice of the
meeting is given or the date on which the resolution of the Board declaring
such dividend is adopted, as the case may be, shall be the record date for such
determination of shareholders.
When
a determination of shareholders entitled to vote at any meeting of shareholders
has been made as provided in this section, such determination shall apply to
any adjournment of the meeting, unless the Board fixes a new record date, which
it must do if the meeting is adjourned more than one hundred twenty (120) days
after the date is fixed for the original meeting.
1.9 Voting
Record. The officer or agent
having charge of the stock transfer books for shares of the Corporation shall
make at least ten (10) days before each meeting of shareholders a complete
record of the shareholders entitled to vote at the meeting or any adjournment
thereof, arranged by any applicable voting groups and in alphabetical order,
with the address of and the number of shares held by each shareholder. The record of shareholders shall be
produced and kept open at the time and place of the meeting and shall be
subject to the inspection of any shareholder or any shareholder's agent during
the whole time of the meeting.
1.10 Proxies. Shareholders of record may vote at any
meeting either in person or by proxy.
A shareholder may appoint a proxy to vote for the shareholder by
submitting (a) an appointment form signed by the shareholder or the
shareholderŐs attorney-in-fact, or (b) an electronic transmission sent in
accordance with the provisions for electronic notice under Section 3.3. An appointment of proxy is effective
when an appointment form or an electronic transmission (or documentary evidence
thereof, including verification information) is received by the person
authorized to tabulate votes for the Corporation. The proxy has the same power to vote as
that possessed by the shareholder, unless the appointment form or electronic
transmission contains an express limitation on the power to vote or direction
as to how to vote the shares on a particular matter, in which event the
Corporation must tabulate the votes in a manner consistent with that limitation
or direction. An appointment of
proxy is valid for eleven (11) months unless a longer period is expressly
provided in the appointment form or electronic transmission.
1.11 Organization
of Meeting. The officer
designated by the Chief Executive Officer (or in the absence of a designation
by the Chief Executive Officer, any other officer designated by the Board) may
call any meeting of shareholders to order and shall be the Chairman of the
meeting. The Secretary of the
Corporation, if present at any meeting of its shareholders, shall act as the
Secretary of the meeting. If the
Secretary is absent from any meeting of shareholders, the Chairman of the
meeting may appoint a Secretary for the meeting.
1.12 Order
of Business. The Chairman of a
meeting of shareholders, determined in accordance with Section 1.11, shall
have discretion to establish the order of business for the meeting subject to
any specific order established by the Board.
1.13
Notice
of Shareholder Business to be Conducted at an Annual Meeting of Shareholders.
In order for a Noticing Shareholder to properly bring any
item of business before an annual meeting of shareholders, the Noticing Shareholder must give timely
notice thereof in writing to the Secretary
of the Corporation in compliance with the requirements of this Section 1.13.
This Section 1.13 shall constitute an Ňadvance notice provisionÓ
for annual meetings for purposes
of Rule 14a-4(c)(1) under the Exchange Act.
(a) To be timely, a Noticing ShareholderŐs notice shall be delivered to the Secretary
at the principal executive offices of the Corporation: not earlier than the
close of business on the 120th day and not later than the close of business on
the 90th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event the date of the annual
meeting is more than 30 days before
or more than 60 days after such anniversary date, notice by the
shareholder to be timely must be so delivered
not earlier than the close of business
on the 120th day prior to the date
of such annual meeting and not later than the close of business on the
later of the 90th day prior to the date
of such annual meeting or, if the first public announcement of the date of such
annual meeting is less than 100 days
prior to the date of such annual meeting, the 10th day following the day
on which public announcement of the date of such meeting is first made by the Corporation. In no event shall any adjournment or
postponement of an annual meeting,
or the announcement thereof, commence a new time period for the giving of a
shareholder's notice as
described above.
(b) To
be in proper form, whether in regard to a nominee for election to the Board or
other business, a Noticing ShareholderŐs notice to the Secretary must:
(i) Set
forth, as to the Noticing Shareholder and, if the Noticing Shareholder holds
for the benefit of another, the beneficial owner on whose behalf the nomination
or proposal is made, the following information together with a representation
as to the accuracy of the information:
(A) the
name and address of the Noticing Shareholder as they appear on the
Corporation's books and, if the Noticing Shareholder holds for the benefit of
another, the name and address of such beneficial owner (collectively ŇHolderÓ),
(B) the
class or series and number of shares of the Corporation that are, directly or
indirectly, owned beneficially and/or of record,
(C) any
option, warrant, convertible security, stock appreciation right, or similar
right with an exercise or conversion privilege or a settlement payment or
mechanism at a price related to any class or series of shares of the
Corporation or with a value derived in whole or in part from the value of any
class or series of shares of the Corporation, whether or not the instrument or
right shall be subject to settlement in the underlying class or series of
capital stock of the Corporation or otherwise (a "Derivative
Instrument") that is directly or indirectly owned beneficially by the Holder
and any other direct or indirect opportunity to profit or share in any profit
derived from any increase or decrease in the value of shares of the
Corporation,
(D) any
proxy, contract, arrangement, understanding, or relationship pursuant to which
the Holder has a right to vote or has granted a right to vote any shares of any
security of the Corporation,
(E) any
short interest in any security of the Corporation (for purposes of these Bylaws
a person shall be deemed to have a short interest in a security if the Holder
directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise, has the opportunity to profit or share in any profit
derived from any decrease in the value of the subject security),
(F) any
rights to dividends on the shares of the Corporation owned beneficially by the
Holder that are separated or separable from the underlying shares of the
Corporation,
(G) any
proportionate interest in shares of the Corporation or Derivative Instruments
held, directly or indirectly, by a general or limited partnership or limited
liability company or similar entity in which the Holder is a general partner
or, directly or indirectly, beneficially owns an interest in a general partner,
is the manager, managing member or directly or indirectly beneficially owns an
interest in the manager or managing member of a limited liability company or
similar entity,
(H) any
performance-related fees (other than an asset-based fee) that the Holder is
entitled to based on any increase or decrease in the value of shares of the
Corporation or Derivative Instruments, if any,
(I) any
arrangements, rights, or other interests described in
Sections 1.13(b)(i)(C)-(H) held by members of such Holder's immediate
family sharing the same household,
(J) any
other information relating to the Holder that would be required to be disclosed
in a proxy statement or other filings required to be made in connection with
solicitations of proxies for, as applicable, the proposal and/or for the
election of directors in a contested election pursuant to Section 14 of the
Exchange Act and the rules and regulations thereunder, and
(K) any
other information as reasonably requested by the Corporation.
Such information shall be provided as of the date of
the notice and shall be supplemented by the Holder not later than 10 days after
the record date for the meeting to disclose such ownership as of the record
date.
(ii) If
the notice relates to any business other than a nomination of a director or
directors that the shareholder proposes to bring before the meeting, the notice
must set forth:
(A) a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting, and any material interest
of the Holder, in such business, and
(B) a
description of all agreements, arrangements and understandings, direct and
indirect, between the Holder, and any other person or persons (including their
names) in connection with the proposal of such business by the Holder.
(iii) Set
forth, as to each person, if any, whom the Holder proposes to nominate for
election or reelection to the Board:
(A) all
information relating to the Holder that would be required to be disclosed in a
proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors in a contested election
pursuant to Section 14 of the Exchange Act and the rules and regulations
thereunder (including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected), and
(B) a
description of all direct and indirect compensation and other material monetary
agreements, arrangements, and understandings during the past three years, and
any other material relationships, between or among the Holder and respective
affiliates and associates, or others acting in concert therewith, on the one
hand, and each proposed nominee, and his or her respective affiliates and
associates, or others acting in concert therewith, on the other hand,
including, without limitation all information that would be required to be disclosed
pursuant to Item 404 of Regulation S-K if the Holder making the nomination or
on whose behalf the nomination is made, if any, or any affiliate or associate
thereof or person acting in concert therewith, were the "registrant" for
purposes of Item 404 and the nominee were a director or executive officer of
such registrant.
(iv) A
representation that the Noticing Shareholder intends to vote or cause to be
voted such stock at the meeting and intends to appear in person or by a
representative at the meeting to nominate the person or propose the business
specified in the notice.
(v) With
respect to each nominee for election or reelection to the Board, the Noticing
Shareholder shall include a completed and signed questionnaire, representation,
and agreement required by Section 1.14.
The Corporation may require any proposed nominee to furnish such other
information as may reasonably be required by the Corporation to determine the
eligibility of the proposed nominee to serve as an independent director of the
Corporation or that could be material to a reasonable shareholder's
understanding of the independence, or lack thereof, of the nominee.
(c) Notwithstanding
anything in Section 1.13(a) to the contrary, if the number of directors to be
elected to the Board is increased and there is no public announcement by the
Corporation naming all of the nominees for director or specifying the size of
the increased Board at least 100 days prior to the first anniversary of the
preceding year's annual meeting, a shareholder's notice required by these
Bylaws shall also be considered timely, but only with respect to nominees for
any new positions created by such increase, if it shall be delivered to the
Secretary at the principal executive offices of the Corporation not later than
the close of business on the 10th day following the day on which the public
announcement naming all nominees or specifying the size of the increased Board
is first made by the Corporation.
(d) For
purposes of these Bylaws, "public announcement" shall mean
disclosure in a press release reported by a national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14, or 15(d) of the Exchange Act and the
rules and regulations thereunder.
(e) Only
those persons who are nominated in accordance with the procedures set forth in
these Bylaws shall be eligible to serve as directors. Only such business shall be conducted at
a meeting of shareholders as shall have been brought before the meeting in
accordance with the procedures set forth in these Bylaws. Except as otherwise
provided by law, the Articles of Incorporation, or these Bylaws, the Chairman
of the meeting shall have the power and duty to determine whether a nomination
or any business proposed to be brought before the meeting was made or proposed,
as the case may be, in compliance with the procedures set forth in these Bylaws
and, if any proposed nomination or business is not in compliance with these
Bylaws, to declare that such proposal or nomination shall be disregarded.
(f) Notwithstanding the foregoing provisions of
these Bylaws, a Noticing Shareholder also shall comply
with all applicable requirements of the Exchange Act and the rules and
regulations thereunder with respect to the
matters set forth in these Bylaws;
provided, however, that any references in these Bylaws to the Exchange Act or
the rules thereunder are not intended to and shall not limit the requirements
applicable to nominations or proposals as to any other business to be
considered pursuant to Section 1.3
or Section 1.13.
(g) Nothing in these Bylaws shall be deemed to
affect any rights of shareholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Notice of shareholder proposals that are, or that the Noticing
Shareholder intends to be, governed by Rule 14a-8 under the Exchange Act are
not governed by these Bylaws.
1.14
Submission
of Questionnaire, Representation and Agreement. To be eligible to be a nominee for
election or reelection as a director of the Corporation by a Holder, a person
must complete and deliver (in accordance with the time periods prescribed for
delivery of notice under Section 1.13) to the Secretary at the principal
executive offices of the Corporation a written questionnaire providing the
information requested about the background and qualifications of such person
and the background of any other person or entity on whose behalf the nomination
is being made and a written representation and agreement (the questionnaire,
representation, and agreement to be in the form provided by the Secretary upon
written request) that such person:
(a)
is
not and will not become a party to:
(i) any
agreement, arrangement or understanding with, and has not given any commitment
or assurance to, any person or entity as to how the person, if elected as a
director of the Corporation, will act or vote on any issue or question (a
"Voting Commitment") that has not been disclosed to the
Corporation, or
(ii) any
Voting Commitment that could limit or interfere with the person's ability to
comply, if elected as a director of the Corporation, with the person's
fiduciary duties under applicable law,
(b) is
not and will not become a party to any agreement, arrangement or understanding
with any person or entity other than the Corporation with respect to any direct
or indirect compensation, reimbursement, or indemnification in connection with
service or action as a director that has not been disclosed therein, and
(c) in
the person's individual capacity and on behalf of any person or entity on whose
behalf the nomination is being made, would be in compliance, if elected as a
director of the Corporation, and will comply with all applicable publicly
disclosed corporate governance, conflict of interest, confidentiality, and
stock ownership and trading policies and guidelines of the Corporation.
1.15 Bylaw
Amendments. The shareholders may amend or repeal
these Bylaws, or adopt new bylaws, even though the Bylaws also may be amended
or repealed, or new bylaws also may be adopted, by the Board, by action taken
in the manner provided by the WBCA and the Articles of Incorporation.
ARTICLE II
Board of Directors
2.1 Number
and Qualifications. The
business affairs and property of the Corporation shall be managed by a Board of
not less than five directors nor more than fourteen directors. The number of directors may be increased
or decreased by resolution of the Board or by the shareholders at the annual
meeting. Directors need not be
shareholders of the Corporation or residents of the State of Washington.
2.2 Election
- Term of Office. At each annual shareholders' meeting the
shareholders shall elect the directors to hold office until the next annual
meeting of the shareholders and until their respective successors are elected
and qualified. If the directors
shall not have been elected at any annual meeting, they may be elected at a special
meeting of shareholders called for that purpose in the manner provided by these
Bylaws.
A
contested election is one in which (a) on the last day for delivery of a notice
under Section 1.13(a), a Noticing Shareholder has complied with the
requirements of Section 1.13 regarding one or more nominees; and (b) prior to
the date that notice of the meeting is given, the Board has not made a
determination that none of the candidacies of the Noticing ShareholderŐs
nominees creates a bona fide election contest. For purposes of these Bylaws, it is
assumed that on the last day for delivery of a notice under Section 1.13(a),
there is a candidate nominated by the Board for each of the director positions
to be voted on at the meeting. The
following procedures apply in a non-contested election. A nominee who does not receive a
majority vote shall not be elected.
Except as otherwise provided in this paragraph, an incumbent director
not elected because he or she does not receive a majority vote shall continue
to serve as a holdover director until the earliest of (a) 90 days after
the date on which an inspector determines the voting results as to that
director pursuant to RCW 23B.07.290; (b) the date on which the Board appoints
an individual to fill the office held by such director, which appointment shall
constitute the filling of a vacancy by the Board pursuant to Section 2.10;
or (c) the date of the directorŐs resignation. Any vacancy resulting from the
non-election of a director under this Section 2.2 may be filled by the Board as
provided in Section 2.10. The Governance and Nominating Committee will consider promptly whether
to fill the office of a nominee failing to receive a majority vote and make a
recommendation to the Board about filling the office. The Board will act on the Governance and
Nominating CommitteeŐs recommendation and within ninety (90) days after the
certification of the shareholder vote will disclose publicly its decision. Except as provided in the next sentence,
no director who failed to receive a majority vote for election will participate
in the Governance and Nominating Committee recommendation or Board decision
about filling his or her office. If no director receives a
majority vote in an uncontested election, then the incumbent directors (a) will
nominate a slate of directors and hold a special meeting for the purpose of
electing those nominees as soon as practicable, and (b) may in the interim fill
one or more offices with the same director(s) who will continue in office until
their successors are elected.
2.3 Regular
Meetings. Regular meetings of
the Board shall be held at such places, and at such times as the Board may
determine, and, if so determined, no notice need be given. A regular meeting of the Board may be
held without notice immediately after the annual meeting of shareholders at the
same place at which such meeting was held.
2.4 Special
Meetings. Special meetings of
the Board may be held at any time or place upon the call of a majority of
directors, the Chief Executive Officer or the Chief Operating Officer.
2.5 Notice. No notice is required for regular meetings
of the Board. Notice of special
meetings of the Board, stating the date, time, and place, shall be given in a
manner described in Section 3.3 at least two (2) days prior to the date of the
meeting. The purpose of the meeting
need not be given in the notice.
2.6 Waiver
of Notice. A director may waive
notice of a special meeting of the Board either before or after the meeting,
and the waiver shall be deemed the equivalent of giving notice. The waiver must be given in accordance
with the requirements for written or electronic notice in Section 3.3. Attendance or participation of a
director at a meeting shall constitute waiver of notice of that meeting unless
the director attends or participates for the express purpose of objecting to
the transaction of business because the meeting has not been lawfully called or
convened.
2.7 Quorum
of Directors. A majority of the
members of the Board shall constitute a quorum for the transaction of business,
but if at any meeting of the Board there shall be less than a quorum present, a
majority of those present may adjourn the meeting from time to time until a
quorum shall have been obtained.
When a quorum is present at any meeting, a majority of the members
present shall decide any question brought before such meeting, except as
otherwise provided by the Articles of Incorporation or by these Bylaws.
2.8 Adjournment. A majority of the directors present,
even if less than a quorum, may adjourn a meeting and continue it to a later
time. Notice of the adjourned
meeting or of the business to be transacted thereat, other than by
announcement, shall not be necessary.
At any adjourned meeting at which a quorum is present, any business may
be transacted which could have been transacted at the meeting as originally called.
2.9 Resignation. A director of the Corporation may resign
at any time by giving written notice to the Board, the Chairman, the Chief
Executive Officer, or the Secretary of the Corporation. Any director resignation is effective
when the notice is delivered, unless the notice specifies a later effective
date.
2.10 Vacancies. Unless otherwise provided by the WBCA,
in case of any vacancy in the Board, including a vacancy resulting from an
increase in the number of directors or non-election of a director under Section
2.2, the remaining directors, whether constituting a quorum or not, may fill
the vacancy.
2.11 Compensation. The Board shall have the sole authority
to fix the compensation of directors.
2.12 Committees. The Board, by resolution adopted by a
majority of the Board, may
designate from among its members one or more committees, each of which:
(a) Shall
have two (2) or more members;
(b) Shall
be governed by the same rules regarding meetings, action without meetings,
notice, and waiver of notice, and quorum and voting requirements that apply to
the Board; and
(c) To
the extent provided in the resolution, shall have and may exercise all the
authority of the Board, except no committee shall have the authority to:
(i) Authorize
or approve a distribution except according to a general formula or method
prescribed by the Board;
(ii) Approve
or propose to shareholders action which the WBCA requires to be approved by
shareholders;
(iii) Fill
vacancies on the Board or on its committees;
(iv) Amend
the Articles of Incorporation;
(v) Adopt,
amend, or repeal these Bylaws;
(vi) Approve
a plan of merger not requiring shareholder approval; or
(vii) Authorize
or approve the issuance or sale or contract for sale of shares, or determine
the designation and relative rights, preferences, and limitations on a class or
series of shares, except that the Board may authorize a committee, or a senior
executive officer of the Corporation, to do so within limits prescribed by the
Board.
ARTICLE III
Special Measures Applying to
Meetings of
Shareholders, the Board of
Directors and Committees of the Board
3.1 Action
by Unanimous Consent. Any
action required or permitted to be taken at a meeting of the Board or a
committee of the Board may be accomplished without a meeting if the action is
taken by all the members of the Board or all the members of the committee. The action must be evidenced by one or
more consents describing the action to be taken, given by all directors or all
members of the committee, as the case may be, to the Corporation for inclusion
in the minutes in a manner equivalent to written or electronic notice under
Section 3.3. Directors'
consents may be given either before or after the action taken.
Action
taken by unanimous consent is effective when the last director consents to the
action, unless the consent specifies a later effective date.
3.2 Use
of Communications Equipment.
Meetings of the shareholders, the Board, and committees of the Board may
be held using any means of communication by which all persons participating in the
meeting can hear each other during the meeting. Participation by such means shall
constitute presence in person at the meeting.
3.3 Oral,
Written and Electronic Notice.
Terms used in this Bylaw shall be as defined in the WBCA.
Oral
notice may be communicated in person or by telephone, wire, or wireless
equipment that does not transmit a facsimile of the notice. Oral notice is effective when
communicated if communicated in a comprehensible manner.
Written
notice may be transmitted by mail, private carrier, or personal delivery; or
telephone, wire, or wireless equipment that transmits a facsimile of the notice
and provides the transmitter with an electronically generated receipt. Written notice is effective at the
earliest of: (a) when received; (b)
five (5) days after its deposit in the U.S. mail if mailed with first-class
postage to the address as it appears on the current records of the Corporation;
(c) on the date shown on the return receipt, if sent by registered or certified
mail, return receipt requested, and the receipt is signed by or on behalf of
the addressee. Written notice to a
shareholder is effective (a) when mailed, if mailed with first class postage
prepaid; and (b) when dispatched, if prepaid, by air courier.
Notices
to directors and shareholders from the Corporation and from directors and
shareholders to the Corporation may be in an electronic transmission which
contains or is accompanied by information from which it can be reasonably
verified that the transmission was authorized by the director, the shareholder,
or by the shareholderŐs attorney-in-fact.
Subject to contrary provisions in the WBCA, notice to shareholders or
directors in an electronic transmission shall be effective only with respect to
shareholders and directors that have consented, in the form of a record, to
receive electronically transmitted notices and that have designated in the
consent the address, location, or system to which these notices may be electronically
transmitted and with respect to a notice that otherwise complies with any other
requirements of the WBCA and any applicable federal law. A shareholder or director who has
consented to receipt of electronically transmitted notices may revoke this consent
by delivering a revocation to the Corporation in the form of a record. The consent of any shareholder or
director is revoked if (a) the Corporation is unable to electronically transmit
two consecutive notices given by the Corporation in accordance with the
consent, and (b) this inability becomes known to the Secretary, the transfer
agent, or any other person responsible for giving the notice. The inadvertent failure by the
Corporation to treat this inability as a revocation does not invalidate any
meeting or other action.
ARTICLE IV
Officers
4.1 Positions. The officers of the Corporation may comprise a Chairman, a Chief
Executive Officer, one or more Presidents, one or more Vice Presidents (who may
be designated as Corporate Vice Presidents, Senior Vice Presidents, Executive
Vice Presidents or Group Vice Presidents), a Secretary, and a Treasurer as
appointed by the Board or the Chief Executive Officer. The Corporation may have such additional
or assistant officers (sometimes referred to as "additional officers") as the Board or Chief Executive Officer
may deem necessary for its business and may appoint from time to time. The Board shall also have the authority,
but shall not be required, to designate officers as the Chief Operating
Officer, the Chief Financial Officer or similar such titles. Two or more offices may be held by the
same person.
If
a director/officer has not been designated as Chairman, or if the designated
Chairman is not present at a meeting, the Board shall elect a Chairman from
amongst its members to serve as Chairman of the Board for such meeting. The Chairman shall preside at all
meetings of the Board, and shall have such other powers as the Board may
determine.
4.2 Appointment
and Term of Office. The Board
shall appoint the officers of the Corporation annually at the first meeting of the Board held
after each annual meeting of the shareholders. If officers are not appointed at such
meeting, such appointment shall occur when possible thereafter, or may be left
vacant. Each officer shall hold
office until a successor shall have been appointed and qualified or until said
officer's earlier death, resignation, or removal.
4.3 Authority
and Duties of the Chief Executive Officer. The Chief Executive Officer shall have general
charge and supervision of the business of the Corporation, shall see that all
orders, actions and resolutions of the Board are carried out, and shall have
such other authority and shall perform such other duties as set forth in these
Bylaws or, to the extent consistent with the Bylaws, such other authorities and
duties as prescribed by the Board.
4.4 Authority
and Duties of Other Officers.
Each officer other than the Chief Executive Officer shall have the
authority and shall perform the duties set forth in these Bylaws or, to the
extent consistent with the Bylaws, the duties prescribed by the Board, by the
Chief Executive Officer, or by an officer authorized by the Board to prescribe
the duties of such officer. Any
designation of duties by the Chief Executive Officer or other officer shall be
subject to review by the Board but shall be in full force and effect in the
absence of such review.
4.5 Compensation
and Contract Rights. The Board
shall have authority (a) to fix the compensation, whether in the form of
salary, bonus, stock options or otherwise, of all officers and employees of the
Corporation, either specifically or by formula applicable to particular classes
of officers or employees, and (b) to authorize officers of the Corporation to fix
the compensation of subordinate employees.
The Board shall have authority to appoint a Compensation Committee and
may delegate to that committee any or all of its authority relating to
compensation. The appointment of an
officer shall not of itself create contract rights.
4.6 Resignation
or Removal. Any officer of the
Corporation may resign at any time by giving notice to the Board or the
Corporation. Any such resignation
is effective when the notice is given, unless the notice specifies a later date,
and shall be without prejudice to the contract rights, if any, of the officer.
The
Board, by majority vote of the entire Board, may remove any officer or agent,
with or without cause. An officer
or assistant officer, if appointed by another officer, also may be removed by
any officer authorized to appoint officers or assistant officers. The removal shall be without prejudice
to the contract rights, if any, of the person so removed.
4.7 Vacancies. If any office becomes vacant by any
reason, the directors may (a) appoint a successor or successors who shall
hold office for the unexpired term (b) or leave such office vacant.
ARTICLE V
Certificates of Shares and Their Transfer
5.1 Issuance;
Certificates of Shares. No
shares of the Corporation shall be issued unless authorized by the Board. Such authorization shall include the
maximum number of shares to be issued, the consideration to be received, and a
statement that the Board considers the consideration to be adequate. Shares may but need not be represented
by certificates. Certificates for
shares of the Corporation shall be in a form consistent with the provisions of
the WBCA or the law of a predecessor corporation and after the effective date
of these Bylaws shall state:
(a) The
name of the Corporation and that the Corporation is organized under the laws of
the State of Washington;
(b) The
name of the person to whom issued; and
(c) The
number and class of shares and the designation of the series, if any, which
such certificate represents.
The
certificate shall be signed by original or facsimile signature of two officers
of the Corporation, and the seal of the Corporation may be affixed thereto.
5.2 Rules
and Regulations Concerning the Issue, Transfer and Registration of Shares. The Board shall have power and authority
to make all such rules and regulations as the Board may deem proper or
expedient concerning the issue, transfer and registration of shares of
stock. In case of the loss, mutilation,
or destruction of a certificate of stock, a duplicate certificate may be issued
upon such terms as the Board shall authorize. The Board shall have power and authority
to appoint from time to time one or more transfer agents and registrar of the
shares of stock.
5.3 Shares
without Certificates. The Board may authorize some or all of
the shares without certificates.
Within a reasonable time after the issue or transfer of shares without
certificates, the Corporation shall send the shareholder a record containing
the information required on certificates by the WBCA.
ARTICLE VI
Books and Records
6.1 Books
of Accounts, Minutes, and Share Register. Except as otherwise provided by law the
Corporation:
(a) Shall
keep as permanent records minutes of all meetings of its shareholders and
Board, a record of all actions taken by the Board without a meeting, and a
record of all actions taken by a committee of the Board exercising the
authority of the Board for the Corporation;
(b) Shall
maintain appropriate accounting records;
(c) Or
its agent shall maintain a record of its shareholders, in a form that permits
preparation of a list of the names and addresses of all shareholders, in
alphabetical order by class of shares showing the number and class of shares
held by each; and
(d) Shall
keep a copy of the following records at its principal office:
(i) The
Articles or Restated Articles of Incorporation and all amendments to them in
effect;
(ii) The
Bylaws or Restated Bylaws and all amendments to them currently in effect;
(iii) The
minutes of all shareholders' meetings, and records of all actions taken by
shareholders without a meeting, for the past three (3) years;
(iv) Its
financial statements for the past three (3) years, including balance sheets
showing in reasonable detail the financial condition of the Corporation as of
the close of each fiscal year, and an income statement showing the results of
its operations during each fiscal year prepared on the basis of generally accepted
accounting principles or, if not, prepared on a basis explained therein;
(v) All
communications to shareholders generally within the past three (3) years;
(vi) A
list of the names and business addresses of its current directors and officers;
and
(vii) Its
most recent annual report delivered to the Secretary of State of Washington.
6.2 Copies
of Resolutions. Any person
dealing with the Corporation may rely upon a copy of any of the records of the
proceedings, resolutions, or votes of the Board or shareholders, when certified
by the Secretary, an assistant secretary, or other officer authorized by the
Board.
As amended effective July 1,
2014
Exhibit 12
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
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(In millions, except ratios) |
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Year Ended June 30, |
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2014 |
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2013 |
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2012 |
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2011 |
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2010 |
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Earnings (a) |
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Earnings from continuing
operations before income taxes |
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$ |
27,820 |
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$ |
27,052 |
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$ |
22,267 |
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$ |
28,071 |
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$ |
25,013 |
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Add: Fixed charges |
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674 |
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489 |
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435 |
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349 |
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207 |
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Add: Cash distributions
from equity method investments |
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54 |
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71 |
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74 |
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14 |
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14 |
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Subtract: Income (loss)
from equity method investments |
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(152 |
) |
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(99 |
) |
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27 |
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110 |
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18 |
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Total Earnings |
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$ |
28,700 |
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$ |
27,711 |
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$ |
22,749 |
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$ |
28,324 |
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$ |
25,216 |
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Fixed Charges (b) |
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Interest expense |
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$ |
577 |
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$ |
394 |
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$ |
345 |
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$ |
264 |
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$ |
146 |
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Capitalized debt related expenses |
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20 |
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35 |
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35 |
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31 |
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5 |
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Interest component of rental expense |
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77 |
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60 |
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55 |
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54 |
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56 |
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Total Fixed Charges |
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$ |
674 |
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$ |
489 |
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$ |
435 |
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$ |
349 |
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$ |
207 |
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Ratio of Earnings to Fixed Charges |
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43 |
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57 |
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52 |
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81 |
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122 |
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(a) Earnings
represent earnings from continuing operations before income taxes and before
income (losses) from equity method investments plus: (1) fixed charges;
and (2) cash distributions from equity method investments.
(b) Fixed
charges include: (1) interest expense; (2) capitalized debt issuance
costs; and (3) the portion of operating rental expense which management
believes is representative of the interest component of rental expense.
Exhibit 21
SUBSIDIARIES OF REGISTRANT
The
following is a list of subsidiaries of the company as of June 30, 2014,
omitting subsidiaries which, considered in the aggregate, would not constitute
a significant subsidiary.
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Name |
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Where Incorporated |
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Microsoft Ireland Research |
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Ireland |
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Microsoft
Capital Group, LLC |
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United States |
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Microsoft Global
Finance |
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Ireland |
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Microsoft
Ireland Operations Limited |
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Ireland |
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Microsoft
Licensing, GP |
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United States |
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Microsoft
Online, Inc. |
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United States |
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Microsoft
Operations Pte Ltd |
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Singapore |
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Microsoft
Operations Puerto Rico, LLC |
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Puerto Rico |
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Microsoft
Regional Sales Corporation |
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United States |
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MOL Corporation |
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United States |
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Skype
Communications S.‡ r.l. |
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Luxembourg |
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Microsoft Mobile
Oy |
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Finland |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the incorporation by reference in Registration Statement Nos.
333-109185, 333-118764, 333-91755, 333-52852, 333-132100, 333-161516,
333-75243, and 333-185757 on Form S-8 and Registration Statement Nos.
333-43449, 333-110107, 333-108843, 333-155495, and 333-184717 on Form S-3 of
our reports dated July 31, 2014, relating to the consolidated financial
statements of Microsoft Corporation and subsidiaries (the ŇCompanyÓ), and the
effectiveness of the CompanyŐs internal control over financial reporting,
appearing in this Annual Report on Form 10-K of Microsoft Corporation for the
year ended June 30, 2014.
/s/
DELOITTE & TOUCHE LLP
Seattle,
Washington
July 31, 2014
Exhibit 31.1
CERTIFICATIONS
I, Satya Nadella, certify that:
1.
I have reviewed this annual report on Form 10-K of Microsoft Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrantŐs other certifying officer and I
are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrantŐs disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrantŐs internal control over
financial reporting that occurred during the registrantŐs most recent fiscal
quarter (the registrantŐs fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrantŐs internal control over financial reporting; and
5. The registrantŐs other certifying officer and I
have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrantŐs auditors and the audit committee of
registrantŐs Board of Directors (or persons performing the equivalent
functions):
a)
All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrantŐs ability to record, process, summarize and
report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrantŐs internal control over financial
reporting.
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/s/ SATYA NADELLA |
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Satya Nadella |
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Chief Executive
Officer |
July 31,
2014
Exhibit 31.2
CERTIFICATIONS
I, Amy E. Hood, certify that:
1.
I have reviewed this annual report on Form 10-K of Microsoft Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
4. The registrantŐs other certifying officer and I
are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrantŐs disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrantŐs internal control over
financial reporting that occurred during the registrantŐs most recent fiscal
quarter (the registrantŐs fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrantŐs internal control over financial reporting; and
5. The registrantŐs other certifying officer and I
have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrantŐs auditors and the audit committee of
registrantŐs Board of Directors (or persons performing the equivalent
functions):
a)
All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrantŐs ability to record, process, summarize and
report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrantŐs internal control over financial
reporting.
|
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|
|
|
/s/ AMY E. HOOD |
|
Amy E. Hood |
|
Executive Vice President and Chief
Financial Officer |
July 31,
2014
Exhibit 32.1
CERTIFICATIONS PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Annual Report of Microsoft
Corporation, a Washington corporation (the ŇCompanyÓ), on Form 10-K for
the year ended June 30, 2014, as filed with the Securities and Exchange
Commission (the ŇReportÓ), Satya Nadella, Chief Executive Officer of the
Company, does hereby certify, pursuant to ¤ 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. ¤ 1350), that to his knowledge:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
|
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|
|
|
/s/ SATYA NADELLA |
|
Satya Nadella |
|
Chief Executive
Officer |
July 31,
2014
[A
signed original of this written statement required by Section 906 has been
provided to Microsoft Corporation and will be retained by Microsoft Corporation
and furnished to the Securities and Exchange Commission or its staff upon
request.]
Exhibit 32.2
CERTIFICATIONS PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Annual Report of Microsoft
Corporation, a Washington corporation (the ŇCompanyÓ), on Form 10-K for
the year ended June 30, 2014, as filed with the Securities and Exchange
Commission (the ŇReportÓ), Amy E. Hood, Chief Financial Officer of the Company,
does hereby certify, pursuant to ¤ 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. ¤ 1350), that to his knowledge:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
|
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|
|
/s/ AMY E. HOOD |
|
Amy E. Hood |
|
Executive Vice President and Chief
Financial Officer |
July 31,
2014
[A
signed original of this written statement required by Section 906 has been
provided to Microsoft Corporation and will be retained by Microsoft Corporation
and furnished to the Securities and Exchange Commission or its staff upon
request.]